When used right, debt consolidation loans can help you get out of a financial mess. If you have a lot of different debts with different interest rates, like loans, credit and store cars, HP, etc., a debt consolidation loan might be for you.
These loans do exactly what they say on the box: they pay off all your debts and combine them into one, leaving you with just one monthly payment to make, usually at a higher interest rate.
The benefits are two fold - you pay less in interest overall (for example, a typical loan is around 7-8% APR, while a credit card is anything from 13% APR upwards) and you also have the physiological benefit of knowing that just one payment has to be serviced every month as opposed to worrying about paying bits and pieces here and there.
Debt consolidation loans should be used in this way. So that by the end of the term, you've paid off all your debts and no longer have to worry about them.
But if you go this route, you need to be strong-willed and careful with your money, because many people end up with more debt. Many people pay off their existing debts and replace them with a debt consolidation loan, but they still keep their credit card "just in case." Then, before they know it, they've reached the limit and are in an even worse financial situation than before.
In fact, recent research from the financial website Fool.co.uk showed that three out of five people who take out debt consolidation loans end up with even more debt.
And only about a quarter of people who get a debt consolidation loan pay off their debts early.
So, if you do get a debt consolidation loan, cut up all your credit cards, get rid of any authorised overdrafts on your bank account, and don't get any more loans!
