The pros and cons of debt consolidation

Many consumers benefit from consolidating their debts on better terms. The potential advantages of debt consolidation over multiple credit agreements include lower interest rates, lower monthly payments and having to deal with only one creditor. However, the costs of settling existing loans (eg early settlement charges), and finding and arranging a new one (possibly including broker commission) can be significant. Debt consolidation loans often have lower monthly payments than the existing multiple debts because the debt is spread over a longer period of time and because it may be secured on property, so lowering interest rates. This means, however, that consumers could well pay more for the credit overall, have a larger debt for a longer period of time and may encounter complications if unsecured debts are consolidated into a secured loan.

Different considerations apply to debt consolidation through credit card balance transfers. Consumers can benefit by consolidating their debts on to one credit card with a lower interest rate. However, they need to be clear about the details of the operation of the credit card and any associated credit card cheques, including limits on introductory offers, different interest rates that may apply for different purposes, and how payments are allocated to different elements of debt. They need to think about the types of debt they are consolidating - the individual amounts and the length of the terms of any loans as well as the interest rates (these could be credit card balances or, for example, household bills). Consideration needs to be given to how long it will be before they can (or want to) pay off the balance. This is particularly important for time-limited special offers.

Many borrowers see debt consolidation as an easy short-term solution to multiple debts and a way of obtaining more credit. However, the possible long term implications may not always be understood. Without clear information on, and understanding of, the costs involved (not just monetary), debt consolidation can create real problems for some people.

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