DEBT CONSOLIDATION 2

Debt consolidation is often thought of as your first line of defense for dealing with debt. Our clients often mention their desire to have all their debts in one place to escape the stress of a thousand statements.

The theory behind debt consolidation is that a single new loan is taken out to pay off your previous debts, often credit cards and personal loans. The idea is that the consolidated debt has a lower interest rate than your previous debts, and so you save money over time.

However, it’s not always as simple as that.

Debt consolidation can result in you paying a lower rate of interest, but if you consolidate all your debts into a secured debt such as your mortgage, you can end up paying back more, given the extended repayment period.

For example, on a debt of $10,000.00 taken out as a personal loan over 5 years at 11% interest you will repay a total of $14,333.51. However, the same debt, repaid as part of a 30 year mortgage at 6% will result in you repaying $23,710.30 – a difference of $9,376.79 dollars. However, if cash flow is your main problem, then the lower weekly repayments may outweigh the fact that you pay back more over time. It just depends on your circumstances and that’s why it’s important to get expert financial advice before you decide whether debt consolidation is right for you.