By Justin Livin

The Benefits of Debt Consolidation Loans

In our sophisticated age of internet technology and advanced banking, it can still be a struggle on occasion to manage our personal finances. There has to be an easier way, right?

If you want to manage debt more effectively, you need to know exactly what your personal outgoings are on a weekly / monthly basis and how that fits in with your budget. Being aware of the outgoings and knowing exactly where your hard earned dollar is spent is one of the key steps to taking control of your personal financial position.

To this end, a lot of people turn to debt consolidation as a solution to simplify things.

Debt consolidation may come in a number of forms, the most popular being a debt consolidation loan. Simply put, a debt consolidation loan brings together all the unsecured debts (credit cards, personal loans) into one 'consolidated' loan repayment.

This means that instead of paying several small payments, you would pay one big payment. The theory is that if all the debts were brought together into one payment, it would save time and money.

There is no doubt that debt consolidation is more convenient, after all its much easier to pay one big payment instead of several little ones. Also, if debt consolidation helps make a budget more 'predictable' in the sense that its much easier to plan for and therefore remember.

The Pitfalls of Debt Consolidation Loans

Debt consolidation loans in theory represent a better way to take control of debt because they make budgeting easier, but there are some points before you agree to undertake a debt consolidation loan.

Before any debt consolidation is considered, its important to know exactly your current debt commitments. You need to know exactly what your creditors are requesting under the existing contracts and then compare that to what you would be required to pay under a debt consolidation loan.

It stands to reason that if you had to pay more money to service the debt consolidation loan in comparison to what you are paying under the existing debt contracts, then a debt consolidation loan may not be the best idea.

The reason for this is that any solution must provide you with a benefit, and if the financial benefits of the existing debt contracts outweigh any benefits that a debt consolidation loan may provide, it may not be the best idea.

Also in Australia, debt consolidation loans are not easy to get if you are credit impaired, have limited assets and questionable serviceability. The ironic thing is that if you meet this profile, you may be the one most in need of a debt solution.

Finally, debt consolidation loans are only beneficial if they form part of an over plan to regain control of your personal finances. Debt consolidation loans are only effective if all the other lines of credit are cancelled, once the balances are transferred.

Unfortunately, its really common for people to leave the credit cards open and available to use after a debt consolidation loan, and when this happens its likely that the credit cards will continue to be used. If this happens, you could end up with double the debt that you had before.

In summary, debt consolidation loans can be a very powerful tool in the battle against personal debt, but there are some very definite pitfalls. As long as you are aware of the benefits and consequences of a debt consolidation loan, you are able to make an informed decision whether this is the best, cheapest and most effective way to take control of your finances.

Justin Livin is a registered Debt Agreement Administrator for Debt Fix. Debt Fix specialise in Debt Consolidation for people struggling with debt.

Tags: Benefits Pitfalls, Debt Consolidation