Making decisions on Debt Consolidation options, Credit Cards and Home Loans

Is Debt Consolidation a sensible option?

Today many of us have a multitude of debt. There’s the mortgage, student loan (if you’re a recent graduate), car loan, home improvement loan, loan you took out to go on holiday last year, credit card(s), store card(s), and high-purchase(s). And, once a month each of these needs to be serviced (i.e. paid). What a headache! So, wouldn’t consolidating all of these into one debt be much more sensible than continuing to pay all these different creditors?

Well, hold that thought for a second, because although it is tiresome keeping track of all this debt, you may actually be doing yourself a favour keeping things the way they are.

As you’ve most probably guessed, debt consolidation is the process of consolidating all of your existing debt into one big debt; by doing this you hope to (i) make management of your debt easier; and (ii) keep your debt service fees down – after all, you’ll only have one creditor to pay each month.

What are the methods of debt consolidation?

The following are the general methods by which you can consolidate debt:
* Unsecured loan - a loan where you borrow money but dont provide security - should you default
* Secured loan - a loan, but in this case youre providing security, in the event that you default
* Increase your existing mortgage - many home owners today, even those who have only had their homes for a short time, have "equity" built into their home. Its possible to ask your mortgage company to increase your mortgage against such equity
* Second mortgage - similar to the increase of mortgage option, only you borrow from a new creditor. You provide that creditor with a "second" mortgage (also referred to as a "second-rank" mortgage, or by its technical term - lien). Here the second creditor accepts theyll be paid out after the principal (or "first-rank") creditor
* Re-mortgage - slightly different: technically a re-mortgage means you have no existing lien over the property and youre willing to provide one against funds borrowed. In other words, its a mortgage
* Consolidation of card debt - here you simply load up all your existing credit card/store card debt onto one card.

Reasons why I would want to consolidate my debt.

The main reasons why you might want to consider consolidating your debt are:
* Lower interest payments - ordinarily, youll obtain an overall lower rate of interest borrowing from one creditor. Very importantly, you can also obtain lower rates of interest if you change the "type" of your debt; for example, you have debt on credit cards and you consolidate this to a loan: its extremely likely the interest rate is going to be lower.
* Lower monthly repayments - again, when you only have one creditor to pay your monthly repayments are likely to be lower. This is the case even where you have the same amount of debt.
* Only one creditor - by far the main reason why people want to consolidate is because they lose track of who they have to pay next. Consolidating should eradicate this problem.

Reasons why I would not want to consolidate my debt

The main reasons why you might not want to consolidate your debt are:
*Costs - this has to be the main reason not to consolidate. There are costs involved: both actual and hidden. These costs will vary depending on your individual situation. They may be small - like having to pay breakage fees (for repaying existing loans) - or they may be considerable - like having your house revalued, by an authorised valuer.
*Secured - whilst security is not always an issue in debt consolidation, it would be the second reason to give serious thought to the process. Also, remember, were not just talking about security if you default, but also what happens if you want to move/sell. Can you? In most cases the answer to that question is going to be no. So be really careful about giving security - think of the long-term implications.
*Interest rate, length of repayment and costs - ask yourself: (a) are you borrowing over a longer period; (b) is the interest accrued (even where the rate is lower) going to be more than your existing debt; and (c) do you have to purchase their insurance product(s)? If so, its likely to be the more expensive option.

The alternatives to debt consolidation

Having looked at what debt consolidation is, the reasons why you might want to consider it, and why you might not, lets consider an alternative to debt consolidation - effective debt management. If you are thinking about all of this because paying multiple lenders is tiresome (and it is!!), in all likelihood, youre looking at the wrong reason. Effective debt management, through the use of standing orders and direct debits, is far more likely to produce cheaper debt service results. However, if you are thinking of this because you simply cannot make your current repayments, again - effective debt management may be the better option. By talking to your existing creditors, who have your borrowing history, you may be able to discuss ways to reduce your monthly debt burden; for example, by agreeing to a "hair-cut" (reduction) on interest, or an extension on the term of the repayment.

Things to think about

Finally, here are some things to think about if you are going to consider consolidating your debt:
1. are there any cheaper alternatives - like effective debt management?
2. what is the interest rate?
3. are there any hidden costs - like insurance?
4. are there any direct costs - like brokerage fees, valuers fees, etc.?
5. what will the monthly repayment be?
6. what is the length of the debt service?
7. is security to be provided?
8. importantly, will I need to pay fees if I want to repay this, newly consolidated, debt early?

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