If you have multiple debts, it is tempting to consolidate them all into one with a single repayment each month.
However, consolidating your debt is only helpful if you will pay less interest.
To find out if that will be the case for you, you need to pay attention to some numbers.
#Knowyournumbers
(full transcript)
By consolidating your debt, you turn multiple debts into one loan with a single monthly payment.
It’s tempting to simplify your debts, but it only makes sense to do so if:
- Your debt consolidation loan has a lower interest rate than the average interest you’re currently paying.
- Your debt consolidation loan does not extend the terms of your other loans – else you’ll just pay more interest.
- You use the loan to repay your existing debts – and not for further spending.
- You do not access new credit on your credit card or overdraft facility until you have settled the consolidation loan.
So if you are struggling with debt but can see your way out of it, debt consolidation may be helpful. But this is only an option if your credit record is still good.
- Try at all costs not to take on any new short-term debt.
- Save up for things you want instead.
- Only take on “good” debt, like a home loan for assets that will grow in value, or for upskilling yourself to earn more.
- And always try to pay off your debt as soon as possible.
Visit the Smart About Money website to learn the difference between good debt and bad debt.
