Debt consolidation as the name implies is simpling combing multiple debts into one loan.
You might have a car loan, a personal loan, a credit card and a home loan. All of these debts will have different interest rates and different loan terms.
Reasons why you would consolidate these debts are:
- to simplify your situation
- to reduce interest expenses
- or to reduce your overall repayments
By reducing the number of loans to one you don’t have to juggle and organise repayments. They can be replaced by just one loan.
Reduce Interest Expenses
As all loans will have different interest rates and different terms, it will probably be possible to combine them in one loan with an interest rate that is lower than the overall current cost.
Personal loans and car loans are typically taken out over 1 – 7 years. This means that the capital component of the repayments are high as a proportion of the total repayment. With the interest expense being the remainder.
By rolling these shorter term loans into a longer term loan, your repayments will be lower.
Typical Debt Consolidation Scenarios
- Roll into one personal loan
- Payout the debt using equity in your home loan