It can be easy to collect up a variety of debts in our society. Student loans are pushed at us during college years, a car loan is needed so we can get to work, credit card offers arrive in the mail, and maybe you took out a personal loan to cover a few things that you really needed. Pile all these up next to a mortgage, and you can have payments coming out every few days, and debt with varying rates, fees, and terms that are impossible to keep track of.
Risks of Multiple Loans
When you have multiple loans it can be hard to keep track of all your repayments. This can lead to either having to keep a higher buffer in your accounts, or simply missing payments and being slugged with fees. They also look terrible on your credit report– while making the repayments will be helping, having so many lines of credit open can be marked against you.
What is Debt Consolidation?
A debt consolidation loan allows you to pay off all your existing debts in one fell swoop – by taking out another loan. You’ll be paying one set of fees, making one regular payment, and tracking one interest rate. In many cases this, might be taken out as an unsecured personal loan, but you could also extend your car loan or home loan and use those funds to pay down your other loans.
The good, the Bad and the Ugly
Debt consolidation loans are usually a great idea when you have a variety of debts that are running at a higher interest rate than your new loan. For example, credit cards often run between 15 and 20%, but an unsecured personal loan can be 7-10%. On a $10,000 balance you’ll instantly save $800 (assuming an 8% reduction).
However there are fees to consider for closing and opening loans. Companies make a profit from your loan and the interest you pay, and by closing the loan early they lose a part of that profit. As such there are often break fees associated with closing a loan early, on top of the regular admin fees.
While debt consolidation loans can save you a lot of money in interest rates and fees, they could also cost you in loan closing / establishment fees. If you are less than six months away from paying off your debts, it’s unlikely that a debt consolidation loan will suit you. However if you feel like your payments are out of control, you can’t see the light at the end of the tunnel, and you’ve got a long slog ahead of you a debt consolidation loan might be exactly what you need to get control of your finances.