The impact of the National Credit Act (NCA) which was conceived as a method of ensuring that consumers were not able to overextend themselves by taking on too many financial obligations, has had the unplanned for effect of leaving people who are already floundering in debt unable to extricate themselves by taking out an additional small loan to carry them through.

For people in this situation, who are often in danger of having their home and other assets repossessed or of having their utilities disconnected, debt consolidation could be the way out.

The objective of consolidating all your debts into one larger personal loan is to raise the combined amount of your separate bills and use this amount to pay off all these smaller debts.

There are a number of advantages to using this method of gaining financial control:

Fewer payments: Consolidating your debts reduces your financial obligations to one payment per month. Having a number of different payments to meet every month, often at different times of the month, can really complicate your life. And if a payment is inadvertently missed or sent in late, you might well be charged a penalty fee which will just increase your debt. A single payment makes it far easier to keep track of your expenses;

Lower payments: Typically the one payment will be considerably lower than the combined payments required for all the separate smaller bills. There are three main reasons for this:

Reduced interest rates: Interest on the single, larger loan is generally much lower than the overall interest rate of all the previous debts. This is particularly so if you owed money on credit cards, store cards or even short term loans, where the interest rate is unacceptably high.

Lower monthly charges: Besides interest rates, the monthly charges on your various accounts, particularly on overdraft, loan accounts and car repayments are usually considerably higher than those on a single loan.

Extended loan period. Usually the loan you take out to consolidate your debts will be repayable over a much longer period than the original, individual accounts. As the payments will be spread out over a longer time the monthly payments will be lower.

It is important to realize that debt consolidation isn’t a magical cure-all however. Before deciding on this option you need into account the fact that although your month to month payments will be lower, by taking out a large loan over an extended period of time, not only will you take longer to pay off your debts but you will inevitably end up paying more over that period than you would have, had you been able to pay off the individual debts timeously.

If you still want to go this route, first calculate the amount of interest you are paying on your outstanding accounts and make sure that there will be a significant savings in interest if you take out a loan to cover them all. (If your existing loans are unsecured, such as credit card debts, you should save a substantial amount). Secondly, plan to pay off the debt consolidation loan as quickly as possible to avoid spending more in the long run.