Is Consolidating Your Debt Always a Favourable Option?
Consolidating is an option when you have taken on multiple debts, and it is difficult for you to keep up with multiple debts simultaneously. A rule of thumb says that you should take out a loan only when it is urgent, and you are sure that you can repay it on time.
Having multiple debts indicate how reckless you are with your money management techniques. Well, you cannot turn back the clock – what has happened has happened, but you can plan that you will not make those mistakes again.
Well, as of now, you have an option of consolidating your debt. Just because you have an option of doing something, it does not mean that you should. Debt consolidation loans with bad credit and no guarantor have lately become a popular way to get rid of all of your multiple debts. Still, they come with several advantages and disadvantages.
Although these loans have certain advantages, you cannot rush to apply for them. You need to understand that whether it will work for you.
Undoubtedly, debt consolidation loans can lower your interest payments, make payment in the form of one large loan convenient, and improve your credit score. However, you still need to be careful about using this option.
You will likely end up paying back more on your debt
It seems amazing that you have consolidated your debt. Now you have one large debt that you have to pay off in monthly instalments.
This seems very comfortable compared to that of the scenario when you have to manage multiple payment dates, but this cannot be the best repayment strategy, especially if you cannot manage your monthly bills.
Do not forget that you have other regular expenses as well that you are to meet. Consolidation is a better option as long as you do not have any problems meeting with monthly bills and debt instalments.
If you are cutting your monthly instalments or you are struggling to make your monthly bills along with your debt payments, you will end up paying a lot more over the cost of your original debt. In fact, it can trap you in a debt spiral.
For instance, you will have difficulty building an emergency cushion, and when you come across an emergency, you will rush to online lenders to borrow money. You will eventually fall into a debt trap because you are already running out of money to make payments.
You will have to pay fees
You think that consolidation of your loans seems to be a better option because you can lower down the interest payment. Now you have only one large debt, and you have to pay that in instalments, so you do not need to worry about anything, but that is not the case.
Do not forget that you will have to pay fees, and it can be 1 to 7% of the total loan amount. If you add up the whole of your debts and you find that it is worth £10,000, you will likely be paying between £1,000 and £7,000.
Do not forget to add the number of fees to estimate how much money you have to pay in total. After adding fees, the total cost of the debt has gone up to roughly £17,000, and it has become almost double. Although consolidating debts seems to be a better option, it cannot be when you are to pay a high amount of money as fees.
Your credit score will go down
When you pay off your debts separately, you will likely improve your credit score provided you pay them off on time, but if you consolidate all of your existing loans, you will not improve your credit score.
This is because you have already fallen behind the payment due dates, and it also shows that you are not able to pay off the debt you have owed.
Consolidation can be a better option if you struggle to keep up with all payments, but it is not always a better option. Before you choose this option, you should think about whether it helps you save some money. A rule of thumb says that you should avoid taking on too much debt if you cannot manage to pay it back.