Is Consolidating Your Debt A Good Idea In The Long Term?

We’ve all heard the enticing daytime TV advice on the benefits of debt consolidation: low-budget ads featuring a man in his mid-40s with an anxious expression. Just when you start to worry, in comes the friendly debt consolidator to address your financial woes by consolidating your bills and loans into one manageable repayment.

In the end, does daytime TV reflect reality? The truth is that debt consolidation is not quite as simplistic as the authoritative tones of the voice-over make it sound. Those who opt for a consolidated monthly repayment often do so as a last-ditch attempt to avoid bankruptcy. However, there are some positives for those who find themselves escalating debt.

Stress Relief

Generally those who chose to consolidate will have faced a lengthy and exhausting battle with their creditors. Most consolidation agreements automatically reduce the current debt by 50 per cent. This will provide immediate relief from the financial burden and allow you to return to your life, at last.

Interest on a Home Loan Is Tax Deductible

This is a lesser-known fact of debt consolidation. Those who use the agreement to prevent foreclosure on their home are entitled to deduct the paid interest from their tax, reducing excessive financial costs. However, this rule does not apply to other repayments such as cars, credit cards and bills.

Tax buttons on a Euro calculator

It Won’t Put a Dent in Your Credit Rating

Many believe that opting for debt consolidation is like defaulting. In fact, by paying off your debts in one fell swoop, it is likely that your credit rating will improve as the loan will likely help you to avoid bankruptcy.

As with any loan agreement, it is vital to compare loans and conduct extensive research on different institutions. There are an array of lenders, all with the same ‘too good to be true’ offers; but all will differ on interest rates and the maturity of the loan.

It is essential to do some research before your financial situation becomes too overwhelming. Otherwise, you run the risk of becoming flustered and taking the first offer that comes along. Thankfully, there are many price comparison websites available to help you find the right loan for you.

However, debt consolidation is not without its pitfalls.

You Need To Be A Home Owner and Qualify For A Mortgage

Although there are exceptions to this rule, the majority of institutions only offer this package to those with equity on their own home. Those who lack this equity may find it difficult to secure the agreement due to a lack of any tangible collateral.

A new housing estate

Failure to Repay Could Result In Home Repossession

Perhaps the greatest pitfalls of them all; those who choose to use their house as equity for debt consolidation risk losing it outright if they cannot make the necessary repayments.

It Can Foster Bad Financial Habits

Although it offers an immediate release from creditors, debt consolidation can be dangerous for those who experience difficulty managing money. It can lull the individual into a false sense of security and tempt them into old spending habits. Taking this route demands a high level of self-control.

With so much banking on the future repayments, when it comes to debt consolidation, it is imperative that the agreement is viewed as the first step in a long-process of changing your spending habits, not a quick-fix solution. Rule number one is never to take the first offer. Compare loans, contrast and take advantage of the no-obligation free quotes available online; whatever you do, choose wisely.

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