THE PROS AND CONS OF HOME LOAN DEBT CONSOLIDATION
A lot of small debts can balloon into one big headache. A simple way to get things under control could be to refinance your home loan to consolidate other debts. So – is debt consolidation right for you?
What It Is
Simply put, debt consolidation is combining all your debts – credit cards, car loans etc. – into one single debt with a single monthly payment. As individual loans, each of them has their own specific interest rates, conditions and balances – so rolling them all into one loan is both efficient and easy to manage.
But before you head down the debt consolidation route, here are some of the upsides and downsides to help you make a well-informed decision.
- Instead of several times a month, pay once. Managing your debt becomes a lot easier when you pay down all your credit cards – as well as any interest you owe – with one repayment every week, fortnight or month over a fixed amount of time.
- One fixed rate and term. This gives you certainty over payment amounts (except when interest rates rise) and keeps you disciplined in paying down debt.
- Less to pay each month. You may end up paying slightly more over a longer term but stretching the term on your loans means that you could well be spending less each month, benefiting your monthly cashflow.
There are always pros and cons to any loan decision. Here are some of the cons of using a home loan for debt consolidation:
- You could accumulate more debt. When you consolidate debt, you free up credit. This might make you think you can spend more and, as a result, you end up with even more debt than you had before.
- Pay more overall. A loan with a longer term can help you reduce your monthly repayments, but a longer term means more interest over the life of the loan.
- Your credit score could take a hit. In the event you don’t keep up with the single monthly repayments on your loan, you could end up hurting your credit score or be in serious financial hardship. However, this also applies to smaller, multiple debts if not kept in check.