The ins and outs of debt consolidation
Debt consolidation is a way of taking out a new loan which wraps all your existing debts together so that you can make one repayment instead of many. In an ideal world this would happen at a lower interest rate, but like anything involving debt there are risks and benefits.
“Debt consolidation loans generally have a lower interest rate. If you have a few high interest debts like credit cards and car loans it’s worth investigating a debt consolidation loan,” says Brent Hunt, Head of Wealth Management Advice. “You could end up paying off the debt faster due to the lower interest rate and it can also make budgeting easier because there’s only one loan to make payments on.”
While rolling all your debts into one loan might work for some people, Brent warns consolidating your debt won’t help much if you keep taking on new debt.
“These types of loans work best when your focus is on getting rid of your existing debt. It might end up being little more than a short-term fix if the new loan repayments can’t be met or you keep incurring debt on your credit cards.”
Brent says there’s a few things to consider before signing up to a debt consolidation loan. “Often the low interest or interest free offers are for a fixed period of time, after which you may end up paying a much higher interest rate – this can add up to more money over a longer term.”
“There can also be extra fees and charges including hidden fees for alterations, late payments and defaulting on payments. Some lenders even charge extra for setting up the loan or paying off existing loans early,” says Brent.
In summary, debt consolidation can help you simplify your debt and potentially pay it off sooner, but be aware of any potential additional costs and your future financial state so you do not continue to add to your debt.