Along with a home loan, many of us also have a car loan, credit card and maybe a personal loan that still needs to be paid off. If you are finding it difficult to manage all your repayments, consolidating your debts into one facility could be an option for you.
What are the benefits of debt consolidation?
Merging all your debts into one can potentially save you money. Your many high interest rate loans will be streamlined into one low interest product which is usually a home loan. You will have better control over your finances since you will only need to make one repayment per month instead of several.
There are some points that you need to be wary of…
You could turn a short term debt into a longer term debt: You know that 5 year personal loan you took out? Well that could now stretch out to be paid off over the next 20 years. Paying off a short term debt over a much longer term means that you will still pay more in interest and fees in the long run.
Consider the fees and charges: You will need to make sure that the interest rate for your new consolidated loan is lower than your current rate on each individual debt; otherwise you will end up losing more money. Since you are setting up an entirely new loan to pay off your existing debts, you may face paying set up fees. You will also be paying off your existing debts early so you may also be penalised with an early exit fee.
You need to be disciplined!To help you pay off your debt sooner you will need to knuckle down and make extra repayments on your newly enlarged home loan. This will help you pay off your debt sooner and in turn maximise your interest savings. You will also need to keep your newly cleared credit card under control. Don’t go on a spending spree and accumulate a new credit card debt which you will again find hard to pay off.
Everyone’s situation is different which is why it is always a great idea to get some professional advice when it comes to your finances and whether it will be beneficial for you to consolidate your debts.