The consolidation question – when consolidating your debts makes sense – and when it doesn’t

One smaller repayment sounds brilliant, but beware the pitfalls of consolidating your debts into your home loan, for you may forever be paying off that big weekend away from last month (or worse still that cute pair of heels).

Juggling a variety of repayments to cover your credit cards, personal loan, car loan and home loan – all of them at different times of the month – it’s complicated. I get that.

And the variety of interest rates; if you’re paying near 20% on a decent balance on a credit card its very hard to get ahead and knock that down. Very tempting to move the lot to an interest rate that’s close to a quarter of what you’re paying.

But the catch is, if you consolidate these loans into your home loan, and pay them off at the minimum payments, you’re paying them off for the balance of 30 years – and 30 years at 4.5% is considerably more than even 17% for 5 years.

So when do you consolidate:

When you’re absolutely struggling and you cannot manage, better to do something than end up losing the lot – and your sanity.

When you’re committed to knocking the lot off faster with a cheaper interest rate – considering setting the consolidation in a separate split on your loan that you can target and get rid of in, say, 4 or 5 years – or sooner. Then keep applying the same money to your home loan and knock that off too.

When you have a bigger goal in mind – if freeing up cash from your weekly budget will help you do something else you’ve always wanted to do – like invest.

And if consolidating won’t work for you here are some tips to get rid of the debts without consolidating;

So simple, but it’s the answer – throw as much extra money against them as you can (always assuming there is extra money to throw there)

Start with the highest interest rate first & interest free facilities last, but make sure these are paid before the interest charges start.

Or start with the smallest balances first for a massive psychological lift, feels absolutely magical to pay that damn thing off.

And if you needed a big reminder on what a credit card can cost, I saw this on the bottom of a statement recently; a $10,000 balance on the card, paying only the minimum payment the bank tells you to pay means you pay $41,164.46 in interest and it will take you 57 years and 2 months to pay off.