What is debt consolidation?
It refers to the combination of several loans into one large loan. This facility allows people with multiple debts to merge all their high interest rate loans into one larger loan that offers a comparatively lower rate. Generally, the more you borrow, the lower your cost of borrowing (interest rate charged on the loan). Hence, if you have several debts in hand, using a personal loan to consolidate them could potentially reduce the overall interest you pay.
Apart from saving you some cash on interest, it also provides you with the convenience of paying all your debts through one loan. In most cases, people usually obtain their mortgage, car and personal loans from different institutions. Besides multiple rates, these loans also require multiple different payments at varying times which could make it difficult, not to mention troublesome to manage. Consolidating all your debt into one helps you easily manage these transactions through one single monthly payment.
What you should know before consolidating your loans
As alluring as it may sound, there are several things that a borrower should keep in mind before taking out a loan for debt consolidation. While consolidating your debt could potentially save you money on interest rates and help you manage your debt efficiently, it still means that you are paying a large monthly payment. Hence, if a borrower does not manage his or her current and future finances properly, they could see themselves falling deeper into the debt spiral.
Therefore, as the first step in creating a healthy financial lifestyle, you should first figure out the size of all your loans, the different monthly payments and how much longer you are still paying on each loan. This is when a loan calculator comes in handy.
The next step is to compare your total debts with your income. Once you have done a summary of your current financial position, start approaching different banks and compare each of their interest rates, product offers, terms and conditions. Use comparison websites like iMoney to speed up this process. While the idea of consolidating your loan is to provide you with a lower rate, it is equally important to consider other factors such as convenience and flexibility of loan repayment.
Finally, even though debt consolidation might work in reducing the amount of interest you pay on different loans, in some cases, this might not happen. Debt consolidation is not a debt solution because it is merely combining all your debts into one lump sum. If your current monthly repayments under a debt consolidation loan seem smaller in figure, it could be due to a longer loan term, which means you could potentially be paying more interest over the entire term of the loan than you would otherwise.
