Debt consolidation is not only for those heading to retirement, in fact it should be considered if you’ve got more than a few loans, regardless of where you are in your financial life.
Managing a number of loans can be confusing, not only from a management aspect, but can also stand in your way if you want to start a new loan.
The concept of loan consolidation is easy. Rather than having multiple loans, take out one big loan, hopefully at a very favourable rate and use that to pay off all the small ones.
There are immediate benefits
- Your loan structure becomes simpler, not only for you, but also for any other lenders that may assess your financial suitability for mor debt. (Careful here – read on).
- Usually the interest rate on a higher value is lower, so you’re saving money on interest.
- Budgeting will become easier, since you’re only got that one loan to take care of.
There are some pitfalls as well
Loan consolidation is designed to get rid of multiple loans. If you keep on adding more loans it defeats the purpose. Once your consolidated loan is established, make sure that it can be extended (within you means) so that you can pay cash for any further purchases. Rather add those to your existing consolidated loan than starting a new one.
Reducing monthly payments by extending the loan term may make things easier month to month, but the extended term will add to the overall cost of the loan, defeating the aim of saving. Make sure that you get solid financial advice before you sign the loan documents. That takes us to another risk.
Documentation and establishment costs
It’s likely that there is a cost to starting a consolidation loan. Be sure to factor that into your planning and know up-front what the total startup and documentation costs will be.
Alternatives to a debt consolidation loan
For a home owner an alternative is to extend your mortgage to cover your loans. Mortgage rates as usually significantly lower than a debt consolidation loan. Be sure to build in some flexibility into your mortgage to allow for the required extension. Then, rather than paying the same on your mortgage, be sure to increase the payments by the amount that you paid off on your loans so that the mortgage is not paid off over a longer period and you pay off more in total.
It’s best to take good financial advice and if your mortgage is used, then best speak to a good mortgage broker.