If you’re one of thousands in the UK looking for a way out of debt, you will surely have heard about debt consolidation. There are many good reasons for this: Debt management plans involving debt consolidation have become an important tool to curb bankruptcy and put debtors in control of their finances again. The reason why debt consolidation has proven so particularly successful is because it is, at least on paper, a strikingly simple procedure: Rather than having to deal with a plethora of creditors, your various payments are consolidated into a single one, payable to a debt management agency. As part of the process, monthly instalments tend to be lower than before and stretched out over a longer period of time. Ideally, you will find yourself with more time at your disposal to focus on your work and family and you will no longer need to worry about creditors hassling you and there not being enough money at the end of the month for even the most basic purchases.

And yet, debt consolidation is anything but a panacea. Although there are cases, when debt consolidation can lead to a lower overall debt burden, this usually isn’t the case: Most creditors wish to be compensated for extending the lease of their loan and this means having to pay off more overall.

There are, therefore, very clear guidelines as to when debt consolidation makes sense and when it doesn’t. Here’s an overview of the most important points to consider before speaking to a debt consolidation agency:

Debt consolidation does not make sense …

… if your current income situation is highly volatile and if it doesn’t look as though it will substantially improve any time soon.

In cases like this, debt consolidation can mean that you are merely running up more debt by extending the lease of the loan, while not being to pay it off anyway. If you know that you cannot meet your obligations, you should seek serious bankruptcy advice and perhaps even opt for a controlled personal insolvency instead.

… if you can actually meet your obligations on the basis of the current payback scheme.

Debt consolidation is not a financial tool to be toyed around with or to be applied casually if it seems convenient. Rather, it offers help for those in serious debt trouble. If you can meet your obligations, why try to find a new solution which may actually end up with you paying more than previously agreed to?

… if it distracts you from paying off your debt.

Because debt consolidation usually means having to pay lower monthly instalments, you will typically have more money to spend on entertainment and leisure. Whether or not this is a good thing depends on your attitude to spending: If you can trust yourself to put the money to good use by putting it on the bank, for example, then this makes sense. If you know you’ll instead waste it on a night out with the lads, then you should reconsider whether debt consolidation is really the right choice for you.

Debt consolidation, however, makes sense …

… if you have a stable income, but just not enough money to pay off your current monthly instalments.

In this case, changing your current debt plan to meet your financial possibilities is a great option. Creditors will naturally be interested in avoiding you going bankrupt and will be likely to agree to a change in plan if this means you’ll be able to pay them back in full.

… if you’re running a serious risk of going bankrupt.

Debt consolidation can keep you from having to apply for insolvency and allow you to maintain a strong credit rating. If this means having to pay off more overall, then that is certainly a benefit worth paying a premium for.

… if you have multiple loans.

It is by no means unusual for many households to have piled up debt with many different sources. The disadvantage of this lies not only in the actual money owed, but also in the fact that having to deal with a plethora of creditors is a cumbersome process wasting a lot of valuable time and resources which could be better spent thinking of ways to improve your situation. Debt consolidation can take a considerable weight off your shoulder and create a situation where you can actually keep track of your finances again.

… if you believe a renegotiation can get you a better deal.

In some cases, debt consolidation can actually lead to a lower debt burden. This is by no means a given, but there may be reasons to believe you stand a chance.

Source: http://www.debtadvisoryline.co.uk/debt-help/debt-management