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Debt solutions

30th January 2022 · 5 minute read

Published by The Real Debt Guy

  • Debt consolidation
  • Consolidation loans
  • Debt relief
  • Debt UK
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Pros And Cons Of Debt Consolidation

Debt Consolidation – Temporary fix or long-term solution?

Having a lot of debt in different places may be a mental nightmare for you to keep on top of. Different dates, different amounts, you may feel you’re spending the whole month working just waiting for payday. Payday comes, then the rest of the month is spent watching the money flying out of your account to pay other people without you enjoying anything yourself.

Then you do a quick calculation, work out you are paying £500 plus each month towards your debts on top of that, you have to remember to make all the payments on time, depressing. If only you could just make one payment per month, reduce the amount you’re paying and without damaging your credit rating.

Introducing….. Consolidation Loans.

What is a consolidation loan?

It’s a loan taken out to clear all outstanding debts, meaning instead of having several debts you are left with one, and with that, one payment each month.

Sounds like a good idea? It could be for some people but let’s introduce Jason.

Jason’s Consolidation Loan

Jason has five different debts:

  1. Barclaycard Credit Card - £5,000
  2. Barclays Loan - £10,000
  3. Virgin Money Credit Card - £3,500
  4. John Lewis Credit Card - £2,000
  5. Santander Loan - £6,000

He is currently paying £1,200 per month towards these debts which in his words is “getting him down”. He feels like he is just working to pay debts. He knows he can’t go on like this as he feels he has no quality of life.

He discovers a lender offering consolidation loans, it could be the answer to his problems. Jason takes the plunge and goes through an application discovering he can reduce his payments to just one payment of £350 per month over a set time period. He is over the moon and signs the agreement.

Many months go by, Jason’s been making payments perfectly, never missed one. However, what you the reader, didn’t know about Jason is that he has a gambling problem. This is why Jason was in financial difficulty in the first place. He managed to free up £850 per month by consolidating his debts, this just gave him money to feed his addiction.

12 months after he took the loan out Jason has a serious debt issue again. How? You might ask. Well, if you remember he had three credit cards (Barclaycard, Virgin, John Lewis) he cleared all of the outstanding debt on these cards, but he was left with credit cards with zero debt i.e., £10,500 of credit.

If you hadn’t already guessed, he maxed out all of the cards again and is now paying £900 towards the credit cards, plus, £350 towards his consolidation loan.

Jason is understandably stressed. He hasn’t told his partner he was gambling and is worried about her reaction.

He goes back to the same lender to try and get another consolidation loan. The lender states that they can’t provide him with another one. Now Jason is in a panic; he needs this loan. The lender replies, “there may be another way” and asks if Jason owns a property. Jason replies that he does but is confused as to why that question was asked. The lender replied that they will be willing to consolidate his new debt plus the consolidation loan he took out with them before into one loan as long as they can secure the debt to his property (a secured loan). Jason’s not sure but then thinks he has no choice and signs the paperwork.

What do you think happened to Jason? The conclusion will come later.

Pros of a Consolidation Loan

  • You may end up with a lower rate of interest
  • Your payments each month will likely be lower
  • You will only be making one payment per month
  • Your debt is with just one lender
  • Your credit rating should not be affected

Cons of a Consolidation Loan

  • You may end up with a higher rate of interest (the opposite of the pros)
  • You might have to secure the loan to your home changing the dynamic of your debt altogether
  • You might not be able to borrow enough to clear your debts, which will mean you still might be paying more than one lender
  • You might have to pay extra costs for the loan (set up costs) which don’t contribute to your debt at all

There are two final cons which, in our opinion, are big issues, let’s head back to Jason’s story first.

Jason – The conclusion

Cutting to the chase, Jason didn’t stop gambling and didn’t stop using his credit cards. Which meant he almost lost his home. The consolidation loan lender tried to force the sale of his property via an Order for Sale due to missed payments. Fortunately for Jason, a relative bailed him out. Things didn’t work out so well for his relationship, his girlfriend left him due to the stress of the situation and she no longer trusted him.

The final cons

Consolidating all of your debts is one thing, but if……

  1. You haven’t dealt with the reasons you ended up in this position in the first place
  2. You still have access to your previous credit facilities

You risk ending up in a situation similar to Jason’s. Taking a paracetamol may give you temporary relief from the pain but does not necessarily deal with the source of the pain.

Don't forget to read The Real Debt Guy's final thoughts below!

The Real Debt Guy's final thoughts.

Dealing with the mental and emotional factors surrounding debt should always be the priority to prevent you finding yourself back in the situation of financial difficulty. You always have to be honest with yourself as to whether an option like Debt Consolidation will solve all your financial problems. We can provide you tools to help make your decision, TRDG has your back, but only you will truly know what's best for you.

We have an entire section focused on your mental and emotional wellbeing surrounding the subjects of debt and finances which you can access here.

It’s also important to explore all your debt resolution options before you make a decision, we give our honest opinion on them, as well as the full details of each option, pros and cons to enable you to make the right decision for you.

Do not feel afraid to talk about your problems with someone else. If you feel like people close to you will judge you or are just not comfortable having this type of conversation. We have our community here for you whenever you need us, no judgment, we are here to support you.

Simplifying complicated matters.

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