‘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.
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.
Consolidating or refinancing loans can work out well if it means paying less in fees and interest. But there are risks:
To reduce the risks, find out the total cost of consolidating before signing up. Shopping around and reading all the fine print helps.
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.