Can debt consolidation solve your debt problems?

The concept of debt consolidation is pretty simple. Take your existing debt which may be loans or credit cards and combine them with your mortgage to have one lower monthly repayment to improve your cash flow.

The real question to ask befor considering this is, “is this a good idea?”. The answer depends on two factors: a) personal financial circumstances and b) the level of debt involved + interest cost relating to the debt. Lets look at both of these factors in turn:

a) Personal finances: your current and future cash flow situation should be the main deciding factor when considering debt consolidation. If you are struggling to meet your debt repayments, you may need the extra cash (from debt consolidation) to pay the bills and put food on the table. However, if your cash flow requirements can be met on a tight budget, a debt management program may be more suited as there is legal protection available and interest can be frozen on your debt by repayments.

b) Level of debt and interest: Large debt balances will take time to repay and if the interest rates are high, you could be in a position where a significant portion of your already tight cash ends up in interest payments alone. You’re probably thinking that debt consolidation is the end all solution but remember, debt consolidation is not interest free. The interest rate on debt consolidation loans may be as low are the borrowing rate on your mortgage but the time period over which it is repaid could lead to a total interest cost which is much more than the interest on your loans and credit cards. Debt consolidation should be an absolute last resort to avoid this ‘interest stretching’ and you should look at alternatives such as 0% balance transfers on credit cards.

Bear in mind: debt consolidation may not be available with your mortgage provider and you may need to remortgage with another bank or building society. This will involve extra costs as you will essentially be taking out a new mortgage and you may also need to think about the right mortgage product with the right rates.