When you have a lot of different loans and payments going out of your bank account throughout the month, it’s sometimes hard to keep track of what you owe and where.
Running a mental tally can quickly become exhausting, and it’s easy for debt to feel overwhelming. That makes the idea of consolidating all your debt into one loan, and one payment, very tempting.
But is it a good idea?
In some ways, yes.
If you’re struggling to make your payments, for example, it’s a good idea to take action before you fall behind. Once you start missing payments, things tend to spiral out of control, which can badly affect your credit rating. And that’s where debt consolidation can help.
When you consolidate debt, it becomes much easier to manage.
Instead of a bill here and a bill there, and keeping track of what’s left owing on each of them, you have one loan with one interest rate, on one term, with one provider. Often, it can be structured so that your new combined payment is significantly less than the total of the previous individual payments.
Sometimes, you can consolidate debt on to a significantly lower interest rate, such as if you move a hire-purchase debt to a personal loan, or get rid of a short-term, high-interest payday loan.
If you pay off what you owe on a lower interest rate, over the same or a shorter loan term than you had previously, you’ll save money every time.
But debt consolidation isn’t always a no-brainer
The most common way that people get caught out by debt consolidation is when they move their loans to a much longer loan term than they were on previously.
Instead of having a couple of years to run on a handful of loans, suddenly they have 10 to run on one big one. Even a 5 percent interest rate can give you a bigger bill than a 20 per cent rate, if you take years longer to get rid of it.
Home loans are a pretty good example of this. Like many people, you might be tempted to roll debt on to your mortgage. After all, with interest rates below 4 per cent, it seems like cheap money. But if you don’t think about it again and spend 20 years servicing that debt, you will unlikely be better off overall.
Plus, don’t forget to watch for fees associated with cancelling your existing loans and replacing them with a new one. Some lenders will charge you to pay the loan back early.
Is debt consolidation right for you?
Finally, one of the most important considerations is how you can use any space in your budget that debt consolidation might create.
If you suddenly feel less ‘in debt’ and like you have more money to spend, you might need to resist the temptation to rack up new loans. Enjoy the peace of mind that debt consolidation can provide, and use this opportunity to regain control of your budget.
Debt consolidation may not be the answer to everyone’s needs, but when planned properly, it can improve your finances and credit. Get in touch to explore your options and determine whether or not debt consolidation is a positive step for you. Call the team at AA Finance on 0800 500 555, seven days a week between 9am and 5pm. We’re here to help.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure the content is correct, the information provided is subject to continuous change. Please use your discretion and seek independent guidance before making any decisions based on the information provided in this article.