Search Menu

‘Consolidating’ debt means taking out a new loan to wrap all our existing debts together and pay them off at once – ideally at a lower interest rate so we get out of debt faster. Debt consolidation can save money and simplify life, but only as long as we’re not running up even more debt in the meantime! So there are risks.

The benefits

Having trouble keeping up with several high-interest loans? It might be worth rolling them into one.

Debt consolidation loans usually have a lower interest rate and tend to be spread over a longer period – so the weekly or monthly payments are smaller.

Debt consolidation can make budgeting easier because there’s only one loan to manage.

We’ll often pay a lower interest rate with a consolidation loan than we would with hire purchase and credit card debt.

However, debt consolidation won’t help if we continue to take on new debt. The key is to focus on getting rid of existing debt rather than adding to it.

Guide to borrowing

Borrowing to make ends meet or struggling with debt? Find your nearest financial capability (budgeting) service

The risks

Consolidating or refinancing loans can work out well if it means paying less in fees and interest. But there are risks:

  • It may be a short-term fix if we can’t meet the repayments on the new loan.
  • Lower repayments but over a longer term can add to the overall cost because we’re paying interest for longer.
  • There can be extra fees and charges, including ‘hidden’ fees for alterations, late payments and payment defaults. Believe it or not, lenders may even charge extra for paying off existing loans early.
  • Companies specialising in debt consolidation may charge higher interest than a bank. Talk to the bank about what they can offer before signing up with a new company.
  • There would probably have been establishment or documentation fees paid on the original loans. Taking out a debt consolidation loan adds another set of fees, which could cost hundreds of dollars.

To reduce the risks, find out the total cost of consolidating before signing up. Shopping around and reading all the fine print helps.

Increasing the mortgage

An alternative option for homeowners to consider could be extending the mortgage.

For someone with a number of loans that charge high interest rates — like a car loan at 15% or a credit card at 19% — it could be cheaper to pay those off by increasing the mortgage.

To make this work you’d need to increase your repayments so that the mortgage payoff date stays the same. Just remember that because the new lending is being paid off over a longer period, the total you pay back will be higher.

The best option is to make the mortgage repayments the same as the total repayments for all your loans. Then because mortgage interest rates are lower, you’ll pay the total off quicker.

Guide to managing a mortgage

 

You may also like...

credit cards leak

BLOG

My credit card was a money leak

Credit cards are great right? When you see something you need, you can have it.

5 Comments | 29 Oct, 2018

rsz istock 473126558 2

BLOG

Seeking payday alternatives

“Swipe right for Mr Right” – this whole Tinder swiping thing has become part of culture these days.

1 Comment | 10 Aug, 2018

rsz istock 690229894 2

BLOG

Down to the debt café

Would you go to a “Death Café”? These are pop-up gatherings of people who come together to talk about the ultimate taboo: our mortality.

6 Jul, 2018

rsz istock 599486368 2

BLOG

Redesign your environment

There’s one thing we can say with some surety: we don’t always make the best decisions for our situations, especially with money. It’s part of being human.

14 Jun, 2018

happy family in kitchen mother and child preparing dough bake cookies picture id658018162 2

BLOG

Homemade loan tips

With so many decisions to make these days, the “family first” rule of thumb can make things simpler. Especially money choices.

1 Comment | 5 Jun, 2018

rsz istock 884359478 2

BLOG

We're not what we buy.

If you’ve ever spent time in Los Angeles, the city may have seemed like an inside joke: you end up scratching your head, wondering why you just don’t get it.

1 Comment | 27 Apr, 2018