Consolidating Debts: Get Out of the Red and Into the Black

The costs associated with pregnancy and the items parents have to buy for a newborn baby for example and even the demands placed on parents from children looking to have the latest toys, gadgets and clothes can often force parents to push themselves deeper into debt and before they know it, their debt has spiralled out of control.

If you find yourself struggling to repay multiple creditors, there are many different options you can choose to take in order to reduce the stress which multiple debts can cause and to help you to manage your debts more effectively.

Debt consolidation is one of the ways in which you can tackle the problem of multiple debt but it’s not for everybody and, whilst it can truly throw a lifeline to some people and can slowly ease them back towards getting out of the red and into the black, it has to be considered carefully as there are many pros and cons and it’s not simply a ‘quick fix’ solution.

Advantages of Debt Consolidation

Multiple debts often cause additional headaches for people as the repayment amounts will inevitably vary on each debt as well as the monthly repayment dates are likely to be different too. Therefore, it’s hardly surprising that people can tend to forget who they owe what amount of money to and by what date payments should be made. Therefore, they rack up even more debt in the form of late payment fees and missed payments. Debt consolidation means you can lump all of your debts and combine them into one fixed monthly repayment on the same date each month. This can help you tremendously with budgeting your money and can help you to improve your money management skills.

In addition, if the majority of your debts are credit and store cards, the interest on these is likely to be much higher than what you’d incur if you combined them all into a debt consolidation loan which means you might be able to meet your obligations each month and pay less out at the same time.

In also having just one creditor to deal with, if you do encounter any further problems, there’ll only be one lot of letters and one set of phone calls to deal with instead of multiple lenders contacting you morning, noon and night which can often add to your stress and can often confuse you even further.

Store cards, in particular, are something which should be avoided at all costs and whilst a newborn baby requires certain essential items, if you’re in a baby store, it is always tempting to buy some additional item of trendy clothing for your newborn. Yet, if you take out a store card, you’ll be subject to an even higher APR than you would be with a credit card. In fact, you may even end up still paying for baby clothing long after your child has grown out of it, if you’re not too careful.

The important thing to remember in successful debt consolidation, however, is to think long and hard about how you got into this situation in the first place, cut up all of your credit and store cards and work out a sensible budget plan for the future which you should review and update periodically. And, although children will inevitably mean that your budget is often stretched to the limit, you may need to learn how to say ‘No’ occasionally to your kids.

Disadvantages of Debt Consolidation

For all of its benefits, there are so many cases of people who have taken out a debt consolidation loan, yet have simply ignored addressing the real issue of how they got into debt in the first place. For those who fall into this category, a debt consolidation loan might be a catastrophic decision to take as you might end up clearing all of your existing debts, and, particularly with credit and store cards, you might then end up running those same debts up again. This could ultimately leave you with the same problems as before, only multiplied as you would still have your debt consolidation loan repayments to make too.

Also, you need to be very aware of the savings you can make. This is because you may get sucked in by making far reduced monthly repayments and, therefore, you think you are saving a substantial sum of money, yet your consolidation loan agreement might be set up to run for a number of years which, depending on your circumstances, could mean that you are paying even more out in total than you would have been liable for previously with your previous arrangements.

You also need to consider the kind of debt consolidation loan you take out. The likelihood is that many of your multiple debts will have been unsecured borrowing so it may well be better for you to try to negotiate some kind of temporary reduced monthly repayment figure with each of your creditors first. With unsecured debt in particular, creditors would often prefer to receive some kind of monthly repayment as opposed to none at all and, although they are under no legal obligation to do so, a temporary reduced monthly repayment and/or the freezing of charges and interest might well be the best option for you if your creditors can agree to it. This, however, might only be a temporary solution and, if agreed, the arrangement is likely to be reviewed every 6 months or so.

Also, if you have a secured debt consolidation loan and then fail to make repayments on that, you could find that you could be forced to sell your home if you’re unable to meet your new repayment terms.

Independent financial advisors and consumer credit counsellors are a useful source of help and advice if you’re unsure what to do about debt consolidation. The important thing is not to bury your head in the sand with your creditors whilst you wait to find the best option. The more honest and open you are with them, the more flexible and sympathetic they are likely to be.