Debt Consolidation Benefits Decline

The benefits of  debt consolidation are fast decreasing.  Most people consolidate credit card debt into personal loans.  The main benefit is the lower interest rate.  However the difference betweed credit card interest rates and personal loan interest rates is decreasing.  With a difference of 5.5% in March 2008 the difference now is only 3.95% and expected to shrink.

Reserve Bank data shows that interest rates on personal loans has been steadily climbing and the last time it was this high was June 1993.  But I hear you say “aren’t interest rates at emergency lows?”  Yes, if its a home loan, but banks quietly jacked up or failed to drop their interest rates on credit card cards and personal loans to offset the losses from home loans.  If you don’t have assets (i.e. a house) the benefits of consolidating your debt haven’t been this small since May 2002.

People may be not be able to consolidate their debts, and affordability declines. Debt consolidation affordability is based on the interest rates on personal loans (debt consolidation loans).   As interest rates rise the affordability decreases, expressed another way the repayments are higher to borrow the same amount of money.  This obviously will prevent people from consolidating their debt and they may have to look at other options like debt agreements, mortgage refinancing, and informal arrangements.