How to succeed with debt consolidation

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For homeowners with multiple sources of debt, the idea of bundling several financial obligations into one loan may be tempting.

Instead of having to keep on top of credit card and personal loan repayments, all their debts can instead be funneled through their home loan.

However, debt consolidation home loans are not for everyone. In some cases, borrowers end up paying more in interest and fees.
The lender may also require additional security to protect them against borrower default, which wouldn’t often be the case with a credit card or another unsecured loan type.

It comes down to personal circumstances and preferences, but for the right type of borrower, debt consolidation home loans could be worth investigating.

Why people choose debt consolidation home loans

A debt consolidation home loan can be a helpful tool for some borrowers to manage different repayment types.

For example, a borrower may have debt accrued on their credit card, as well as a car loan and a home and may struggle with several payments a month.

A debt consolidation loan could allow them to instead make one monthly payment for each of their sources of debt through a new home loan. For some time-poor borrowers, it can simplify their financial commitments.

If the interest rate and fees on the debt consolidation home loan are lower than other financial products, there is also the potential for the borrower to save money by refinancing to a new loan.

Keep in mind, this is not always the case, so it’s important for borrowers to do their due diligence on the debt consolidation loan provider and their offering.

Not for all borrowers

There are several traps to be aware of for borrowers considering this loan type.

For instance, a lender will usually require collateral for a debt consolidation loan, which means borrowers have to put up one of their assets – like their home – as security. If the borrower then defaults on their loan, they could end up surrendering their home to the lender.

The other thing to be mindful of is whether or not the loan would actually work out cheaper.

Sometimes fees and interest are more than regular home loans, so it’s worth using a calculator to do the sums on whether merging debt would result in a net saving.

For example, instead of paying off a credit card over a few months, the debt may be extended over a few years, which could result in a higher overall amount of interest paid.

Finally, it’s important to be sure debt consolidation home loans are being offered by a trusted lender. According to MoneySmart, some companies encourage borrowers to sign up for loans that are unnecessary for their types of debt and which could end up increasing their financial strain.

It’s important to make sure any loan is fit for your purposes.

As with any loan type, there are pros and cons to debt consolidation home loans. For some, it could reduce costs and improve simplicity, while for others it won’t be suitable.

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