Loans and credit

You are here: ninemsn > Money > Loans and credit

Debt consolidation: is it for you?

From Money Magazine, November 2004

Folding all your loans into one when you’re up to your neck can help, but it'll be game over if you don't follow some strict rules of budgetary behaviour says Paul Clitheroe.

With credit so readily available, borrowing money via loans and plastic has never been easier. But it’s not so easy when the time arrives for the monthly repayments, particularly if you’ve overcommitted to a number of debts. As a result, some mortgage brokers and lenders have been trumpeting the virtues of "debt consolidation". Under this strategy you bundle all your outstanding, higher-interest debts into one loan with a lower interest rate. It can reduce your immediate monthly debt obligations by hundreds of dollars.

Typically debts are bundled into mortgages because home loan rates are mostly the lowest available and homes provide the lender with more security. If you don't have a mortgage, it might be possible to consolidate your debts into a personal loan. But – and it’s a big but – this strategy will only work if you break the spending habits that drove you into debt in the first place. While altering habits involves budgeting better and spending less, shredding the plastic cards is also essential!

It's true consolidation leaves you with a "nil balance" against your cards. But this doesn’t mean the plastic nasties can’t be used again. If unexpected bills hit the mailbox there’s nothing stopping consumers whacking payment on the card.

If you don't commit to disciplined spending habits, debt consolidation won't help and may leave you poorer by thousands of dollars.

For the complete story see Money Magazine's November 2004 issue. Subscribe now.