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Debt Consolidation – The Benefits and Downfalls

Debt Consolidation

What is debt consolidation?

Debt consolidation is a common method used by many to assist in their overwhelming financial outgoings. If you are repaying multiple debts you could “consolidate” them, meaning that you would be combining all those debts into one single and more manageable repayment.

Is this financially beneficial?

Not in the long run it isn’t. You would be effectively taking out yet another, larger loan to pay off your current debts. This will certainly bring peace of mind as you would only have one single payment to worry about though your outgoings would now be much lower than they once were the same fee would still be owed and still be required to be repaid in full but over a much longer period of time, with interest of course. Some may consider this a small price to pay for an easier life….

But how small is the price?

Here is an example of what John currently owes and how a debt consolidation programme would affect his outgoings and incurring interest.

Let’s say John owes £10,000.

– £7,000 on his credit card at an interest rate of 17.9%.
– He is overdrawn with his bank by £2,000 and they charge 18.9% with a typical additional monthly charge of £20.
– He also owes £500 on a small loan at 68.8% interest.

John would be paying £435.83 monthly in fees and interest. If he decided to stick with his current outstanding loans with the interest and additional fees it would cost him £4,145.99 to completely clear his debts. Using a debt consolidation programme of which the interest rate would be only 12.6% John would pay a total of £3,529.30 saving him £616.69 however these rates may not apply to you. If you are borrowing a larger sum as exampled above the repayment rates would be lower where as if you borrow a smaller amount the interest rates would be higher so if you are in a relatively small amount of debt, then a consolidation programme may not be the best option for you.

If you would like any further information on debt consolidation or money management advice there are several links below that we thought that you may find helpful.

– http://www.scottishtrustdeed.co.uk/blog.asp?id=1
– http://www.debtadvicefoundation.org/debt-solutions/debt-relief-order
– http://www.scottishtrustdeed.co.uk/blog.asp?id=1
– http://www.debtadvicefoundation.org/debt-solutions/debt-relief-order