When to Consolidate your Debt

With petrol and food prices continually on the rise, it may be tempting to consolidate your debt to ease the pressure of repaying it. It does make sense to do this in some instances but you need to ensure that you consider the options carefully before consolidating the debt.

Consolidate because you cannot afford to do Otherwise

This is probably one of the worst reasons to consolidate your debt but it is preferable to defaulting on your repayments. Keep in mind that consolidating reduces you instalment by increasing your loan repayment term. This means that you are paying more interest in the long run. If you find that you need to consolidate in order to meet the minimum payments, ensure that you close off the credit cards and accounts that have been consolidated and apply any extra money you have towards paying off the loan.

Consolidate for a Better Interest Rate

It can make financial sense to consolidate your credit card debt into your mortgage to take advantage of the lower interest rate. This only works, however, if you pay the same instalment you would have paid into the credit card into the mortgage. A mortgage is a long-term loan and a credit card is a short-term one. That is one of the reasons that a mortgage is at a lower interest rate. If you take the credit card debt and spread it over the term of your mortgage, you will find that you pay a huge amount of interest on it. The second caveat here is that you then need to either close off your credit card or be in a position to pay the full amount used at the end of every month. If you are not disciplined in this respect, you will find that you will keep having to refinance your card and will end up with no equity in the property.

Consolidate for Convenience

It can be convenient to have one standing order for all your debt. Again, to get the full benefit here, you have to pay the same instalment that you would have had the debt still been separate amounts. Speak to your finance company about increasing the standing order to take full advantage of this benefit. Consolidation can be an excellent financial tool if you are disciplined about it and go about it intelligently. If you are consolidating so that you can buy some new gadget, it is a very bad idea. Rather wait until you have enough cash for the purchase. Whatever your reason for refinancing, remember the cardinal rule – always pay more than the minimum.

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