What's wrong with consolidating?

climbgirl

There are two reasons why consolidation is generally considered to be a bad idea (I say generally, will explain that later!)

1. people consolidate credit card debts with a loan, but fail to close the credit card accounts and run up the debt on the cards again. So you end up with the loan and new credit card debt as well, effectively twice as much debt.

2. consolidation loans tend to reduce your monthly payments which can seem like a good thing. But it actually means you're taking much longer to pay off your debts, and paying more interest. So in the long run you pay a lot more than you need to in order to pay the debt back. It costs you more.

Having said that sometimes a consolidation loan can be a good idea. If your APRS are very high and you get a low consolidation loan APR, even though you might be taking longer to pay, the lower interest rate may mean it costs you less in the long run (depends on the individual circumstances, you'd need to crunch the numbers). This will only work if you close the credit cards and don't run up any further debt!

Tondella

I would add to these arguments for consolidation loans in certain circumstances (and with a will of steel) and say that you should consider a loan that has some flexibility in it (i.e. allowing overpayments without fees, or even early repayment), as you will be able to increase your payments and decrease the period of your indebtedness as your financial circumstances improve (i.e. an unexpected bonus, wage increase, cancellation of expensive mobile/tv contracts, better budgeting, etc)

mjh1977

Climbgirl is right. In my case, I concluded it was worth paying a bit less each month for short-term survival. It was a slightly more expensive option in one sense, but equally has stopped overdrawn charges, late payments (though the latter is clearly my own fault!) etc.

In Steve's case, the combination of 'cards, overdrafts and dregs of past loans' doesn't sound as positive as paying the balance off on a regular 5.8% loan, and sounds like there's scope to run up further debt on these. But obviously I don't know the specific details...

M

in_debt_again_but_dealing_with_it

I did exactly that less than 12 months ago, £6,000 credit card, £500 overdraft took out £7,000 loan (you know round it up!!) to pay it off (!) and within a month started using the credit card again, here we are in March and my card is over max at £6,600 I'm over my overdraft limit and I still have 35 months left on the loan. The scary thing is I'm not sure I wouldn't fall into the trap again, so I'm hesitant about a consolidation loan for me, atleast until I've identified where the overspend keeps happening. I'm sure they can and do work, particularly if like me you only pay minimum payment and at current rates I think it would take about 12 years and a whopping £21,000 in insurance and interest to pay it off! ouch. You're in the right place and I'm sure you can take control.

CLAPTON

in adition to the excellent posts already made, another draw back of consolidating into longer term debts even at low interest rates is that its difficult to know what your future situation will be . although it may be attractive for a young person to consolidate, but if you decide to have children and have to make do on only income you may well still be repaying your consolidated loan.

mjh1977

Here's a suggestion - I've not done it myself, but it seems logical:

Set yourself a budget that's realistic for you and that you can realistically keep up, but allows you to have some surplus money each month, whatever you can afford. Put this 'spare' money in a savings account.

After a reasonable amount of time, when you're content you can keep up the budget, consolidate your loans: but you will already have some savings which you can use to take out a smaller loan, as you will pay some off - ie you will be 'rounding down' rather than 'rounding up'. And you minimise the risk of building up more debt, because you've already had three months to get used to your new spending habits.

And then close your cards down.

lynzpower

Claptons exactly right here

I had debts from UNi, then consolidated. So I had a loan & the student loans. But sure enough, like many of us here, ran up the CC's paying minimum payment, then phewee ANOTHER consolidartion loan ( this time luckily to my parents) while still spending on the cards. Lightbulb moment happened last month, and although im luckily not in the direst of straits, I would NEVER recommend a consolidation loan, as as another poster said, its too easy to get, too easy to carry on spending with the cards snd a consolidation loan does not take into account your potential future changes.
This time last year I wouldnt believe you if you told me that now Id be looking at moving house and getting married and wanting to start a family asap. It wasnt in my plans, but life changes and having a five year loan hanging over plans stops them happening.

I wish you the best of luck with all of it, you are definatley in the right place!

tattooed_lady

Depends on how disciplined you are - if you know that you will NOT run up more debt, then it could be ok. I very stupidly took out 3 consolidation loans of £2k each and still ran up the cards. Took me 6 years to pay it all back. Big bl**dy mistake.:mad:

mjh1977

There seem to be two main reasons being given against consolidation loans this morning, and I'm not sure I'm convinced by either of them...

The first is that the consolidation loan becomes an extra loan, and not (by definition) a consolidation loan. I know how easy that is to do, but it's not an argument against consolidation loans per se

The second is that consolidation loans have to be paid off in the future, so are a bad idea because they limit your freedom. Surely if you've already got loans and cards outstanding they'd have to be paid off anyway, potentially at higher rates. Additionally, if it's cards you're using, presumably you're still able to carry on using them until you reach your limit, whereas a consolidation loan can be capped.

I'm not a consolidation loan salesman, by the way. It's a question of finding the right kind of loan that gives you the flexibility to cope if circumstances change, and of getting best value. To be honest, I think if you're going to carry on spending you're going to carry on spending, and that's kind of a separate issue from how best to manage existing debts.

rubix_76

I am in a situation where I have taken out a consolidation loan. I have an argument both for and against.

The for argument is I know where I stand each month, ie the same amount is paid out, and I will be able to keep track of one payment much easier than say 7 or 8 CC etc. I know the salesmen out there would love me because this is a big "selling point" to play on peoples vunrebility (nice spelling !!!). And it allows me to Budget much easier.

The against is the minute you take out a loan on say 10k a shed load of interest is piled on, even if you paid it off in a few weeks !!! (take note Tessa Jowell !!!) and of course in many cases there is little or no flexibility for overpayments or early repayment.

For me the former far outweighs the later becease we have a Baby on the way, and knowing where we are each month is more important (the same reason I took out a fixed rate mortgage too).

Rubix (awaiting everyone 2p's worth, better in my pocket than theirs :rolleyes: ) :rotfl: