Times might be hard, several lenders calling about their payments, and cost of living biting every red cent left in your account. Just trying to keep up with ongoing payments might seem like the best idea in your mind, but it’s becoming more difficult to maintain your ability to meet your basic needs and survive. This is where a debt consolidation loan might be a good tool to lighten the burden and give you more breathing room to survive.

Debt consolidation involves taking out a new loan to clear other existing debts like other loans, credit cards or credit facilities. This results in the borrower having one loan that they will pay instead of several loans to different lenders.

Let’s say someone has credit card debt being charged at a 55 per cent annualised rate. The credit card interest is additive since the rate is charged on each month’s prior statement balance, not what has been paid so far. This means that the subsequent months can see the person paying more in interest due to the compounding effect. If they take out an unsecured debt consolidation loan at a 22 per cent interest rate, they will have a fixed monthly payment, a much lower cost of financing and be in a better financial position once they’re able to maintain good financial habits.

The positive in this instance is that the borrower will have one monthly loan payment which probably might be at a lower monthly payment. This can result in the borrower having more financial breathing room to recoup and build back up their credit score.

The major caveat which can come with a debt consolidation loan is that the borrower can end up paying more for the overall cost of the loan if the tenure of the loan is longer or the interest rate is higher than the prior debts. The borrower’s credit score could also be slightly lowered in the short term, something that can affect qualifying for other loans.

Despite these cons, a borrower having a lower monthly payment means that they can focus on better navigating the rising cost of living and seek additional sources of income to put them in a better position. Although some persons might see a debt consolidation loan as an embarrassing thing to do, it’s better to seek forgiveness with your lenders and maintain a positive relationship which works out better for everyone, including your mental health. So, if you’re having hard times, speak to your banking representative and see what options exist to correct your hardships through a restructuring of your debt obligations.