I get lots of questions from readers asking whether they should consolidate existing debts into one new loan. It can often seem like a good idea – having one loan with one bank or other lender might be easier to administer than looking after payments on five or six credit cards – but there are several factors that you have to consider before deciding if it’s the best course of action for you.
The most important thing to do first is to have to look at the numbers. Will the interest rate that you pay on your new loan be lower than the interest rate on your existing credit agreements? If not then it’s almost certainly not worth looking at.
If it is then you need to look at the monthly payments involved. A lower rate of interest doesn’t necessarily mean lower monthly payments. If your existing credit agreements are long-term, or are with credit cards and have no set term, only a minimum monthly payment, then a shorter term loan, even at a lower rate of interest, might still cost you more in the short term.
So while you will save on the overall interest payments you will make over the term of the debt your monthly payments might be higher and you will need to factor this in.
There is one other really important thing that you will have to do if you are serious about using a new personal loan to deal with exiting credit card debt.
Cut up your credit cards!
There is no point taking out a loan to repay credit card debt if you keep hold of the credit cards that caused the problem in the first place and start to spend again. You’ll only be throwing good money after bad and you’ll end up in exactly the same place in 12 months time.
If you must then keep one card and use it to buy things that you know you can afford, and pay the bill off in full at the end on every month. That way the goods that you buy might benefit from extra consumer protection under Section 75.