Are Debt Consolidation Loans A Good Idea?

We all know life can get messy.

Chances are you’re juggling a career, family and social life while trying to earn enough money to pay off your mortgage and other debts. Keeping track of all these different payments can begin to feel like a burden.

If you have different credit card debts or outstanding personal loans across a range of lenders, you’re likely to be paying a staggering amount of interest. With a home loan in the mix, the interest from your debts alone will consume a substantial chunk of your income.

You may find yourself asking ‘are debt consolidation loans a good idea?’

Debt consolidation means combining all your existing debts into one repayment. This means that, for example, instead of paying off a credit card with an interest rate of 18% or higher you can potentially pay it off at the same interest rate as your mortgage.

Wondering if debt consolidation loans are right for your situation? As experienced loan brokers with personal financeexpertise, Time Home Loans can show you through your options and make sure that the strategy is advantageous for you.

Here’s our guide to the all-important topic: are debt consolidation loans a good idea?

Are debt consolidation loans a good idea?

 While debt consolidation loans are right for many people, their success heavily depends on your financial situation and spending habits. Like all financial options, there are pros and cons to keep in mind.

Debt consolidation loans are a good idea when they help you save more and pay down your debts faster. They can be very helpful if you’re grappling with high-interest debt (e.g. credit cards) or you qualify for a substantially lower interest rate than you’re currently paying.

Speaking to loan brokers can help you secure a better deal and ensure you’ll be paying less interest. Beware of companies that make extravagant promises or swear they can get you out of debt no matter how much you owe.

If switching home loans turns out to be a more effective strategy for your situation, a good loan broker will advise you of that too.

 Pros and cons of debt consolidation

 The benefits of having one loan typically outweigh the benefits of having multiple loans. So are debt consolidation loans a good idea? Here are the pros and cons to help you decide:

Pros:

Savings

Ideally, you’ll want your new consolidated loan to have a lower interest rate than your other loans, cutting down on the amount of interest you have to pay on a regular basis. You may also be able to reduce your repayments by stretching your loan term, although this ultimately results in paying more interest over time. You may also be able to save a little more in other fees.

Just one loan

Consolidating your debts means you’ll only have one repayment to make every week, fortnight or month, over a designated amount of time. It makes budgeting much easier.

A clearer timeframe

Instead of keeping track of multiple repayment schedules, you only have one timeframe to consider. This gives you a much clearer idea of when you’ll be free from debt.

 Cons:

 Potential for higher interest

Many people choose a longer loan term to make monthly repayments more affordable. However, that can backfire in terms of interest that turns out to be higher over the long term. It’s important to find a lender that can help you strike the right balance between short and long-term saving.

Financial risks

When you’re refinancing your existing debts, it’s important not to commit to a payment schedule you can’t meet. Always check for fees in your new plan too. Otherwise, you might end up running into financial trouble and even hurting your credit score.