Money & You

Are there downsides to debt consolidation?

May 6, 2023

Debt consolidation can be a very effective way to smash your debt down to size. It offers a more simple, straightforward payment schedule and, in some cases, lower interest rates. The Moneyspot team specialises in debt consolidation. But we also specialise in not mucking you about. So here are a few of the possible downsides of debt consolidation you should know.

1. If payments aren’t met on the new loan, it’s just a short term fix

Debt consolidation is sometimes sold as the answer to every debt problem, making it sound like all you have to do is sign on the dotted line and boom, no more worrying about your debt. The reality is very different. Debt consolidation loans are still loans, and if someone is struggling to make repayments on their existing debt, there’s a chance they’ll struggle with the debt consolidation loan repayments too.

This is why it’s so important to not let your guard down on the debt, even if the repayments are lower than before. The consolidation is there to provide breathing space, not a complete solution.

2. A longer loan term can end up with larger overall loan costs.

One of the ways debt consolidation loans reduce repayments is by stretching the debt over a longer overall term (the number of years you have to pay before the loan is completely cleared). This means you pay interest for longer and can mean the total amount you pay in the long run is larger.

Again, this depends a lot on the maths. A lower interest rate over a long period of time can be cheaper than a higher interest rate over a short period of time. It just depends on the loans being consolidated.

3. There can be extra charges from the original lenders

When you consolidate a loan, you’re basically taking out a new loan and using the money to pay off all your other outstanding debts. Some lenders charge to let you do this, with extra fees tacked on for alterations, any late payments, payment defaults, or just “early repayment” fees.

This is pretty stink and it isn’t always clear that you’ll be charged these fees when you sign up to the original loans. Often, these fees can be wrapped up into the debt consolidation loan, so you don’t have to pay out of pocket. But that’s still extra money you have to pay interest on.

So is debt consolidation worth it?

Debt consolidation is just one of many tools to help manage debt. It isn’t always the best choice - contrary to what some lenders might want you to believe - and it doesn’t get rid of the required mahi to make money work for you (instead of the other way around).

However, it still offers breathing space for many borrowers who otherwise might struggle to get out from under an avalanche of unmanageable payments. As with all things money, knowledge is power and there’s never a single perfect answer. But to get the best possible answer, keep arming yourself with the knowledge you need!

This was originally posted as an education article on the Money Sweetspot customer portal. If you read this as one of our customers, you would've earned some money off your loan! Do the mahi, get the treats. Find out more.

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