Debt Consolidation Tips

It never fails to amaze me that when someone needs a debt solution; that is they are struggling under the multiple debts they may have and they need to reduce their outgoings, they automatically believe that a debt consolidation loan is the only answer.

Don’t get me wrong, a debt consolidation loan may well be a good option, however as a popular as they may be, a new consolidation loan is not the only answer. Moreover, whilst it’s often true a consolidation loan can provide an effective solution, it’s not always the best way to go and care must be taken in deciding whether this is the way to go.

Is a loan the way to go?

When it comes to debt consolidation loans, essentially what you’re doing is swapping bad debt for different bad debt. The debt doesn’t magically disappear, instead it simply takes on a different form i.e. instead of paying many debts you make one payment.

As said before, a debt consolidation loan may be an effective strategy to deal with unmanageable debt(s) but only as long as the one loan repayment is cheaper than the sum of the current debt repayments. Unless this is the case, essentially all you’re doing by consolidating is swapping bad debt for different, more expensive bad debt.

Credit providers have an obligation to demonstrate that there is a net financial benefit to the end borrower when consolidating. This said, the credit provider must examine your current situation as far as your debt repayments are concerned and compare it to your position under a new loan.

Paying one debt overall instead of many is certainly more convenient than paying several smaller debts, however it is important to base your decision not on how easy your life would be if you only had to make the one repayment, but instead how much the one repayment costs, your budget and whether or not you can meet the expense.

What are the costs?

When considering a debt consolidation loan, you should think about the interest you’re currently paying versus the interest under any new loan. Added, you should also consider any other fees and charges which may apply as well these costs dilute any benefit.

One thing that I come across pretty often is people wanting to consolidate an unpaid, interest free debt (e.g. unpaid telephone bill, utility bill etc.). To me, this doesn’t make sense, because if you consider that interest is the cost of finance why would you swap this interest free debt for a more expensive debt?

Accepting that a telephone bills attracts zero interest, if you were to consolidate this debt with others into a loan converting an interest free debt into an interest-bearing debt, any benefit the loan would provide would diminish by the amount of interest applied that that portion of the loan the telephone debt represents.

Therefore, when it comes to rolling several debts into one loan facility, the financial benefit should be paramount in the decision-making process.

A reasonable argument exists that a consolidation loan is only a viable option, when under a new facility; both interest and overall monthly payment are overall cheaper.

Close the Cards

When you consolidate debts under a loan, it is not always the case that the (consolidated) credit cards will be closed. It is not the responsibility of the loan provider to close the credit cards, despite the fact that this is something that a lot of people expect will happen.

This leads to my next tip: always make sure you close the credit cards if you consolidate them.

Presumably, the purpose of consolidating debt is to ultimately pay off the debt and become debt free. If the credit cards remain open once you have consolidated, this leads to an artificial sense of wealth which could result in those same credit cards being relied upon.

This is a very common “trap” which a lot of people fall for.

Accepting that spending habits are often difficult to change (much like any habit for that matter), if you are used to relying on credit cards for purchases, there is no reason this habit will change overnight therefore the temptation should be removed altogether, if debt relief is the overall aim.

Loan Assessment

When you apply for a loan, the loan provider will assess the your application to determine your credit worthiness, In doing so, the credit provider must satisfy themselves that you are able to meet your obligations as specified under the contract. Naturally, your credit history plays a big part in this however it’s not the only factor that’s considered.

Credit providers will consider your income, employment, assets and budget when assessing your credit worthiness. In determining whether a loan is possible, the credit provider will apply their own in-house measures to ascertain the risk and this in turn will be reflected in the interest rate offered if the loan is approved.

If you pay your bills on time, if you have stable employment in a secure industry and a reasonable amount of assets, and if you can afford the loan repayments, then a consolidation loan may well be possible.

Another common mistake people make when applying for credit is that they will shop around for a loan and make multiple applications. From a very young age, we are conditioned to shop around for the best deal but when it comes to finance, this is possibly the worst thing that you can do, as each application appears on your credit file. Multiple applications give your credit providers the impression that you’re desperate for a loan and present you as higher risk borrower.

It’s important to realise from the outset that whilst you should indeed do your research, when it comes to actually making an application for a loan, an application should only be placed with the bank or finance company which presents the strongest likelihood of success having regard for your circumstances.


As previously stated, a consolidation loan to consolidate debts may not be the answer for everyone, but certainly it could provide a reasonable way to rationalise debts. Whether it’s a loan or you’re looking for some other alternative solution to manage debt, you should only rely on professional advice and opinion to make a decision. Contact us for more information.