Consolidation Loans

An option often promoted but usually not of practical value for our clients is the idea of consolidating debts into one loan. The idea behind this is to gather all debts and make one new loan with hopefully a lower interest rate and only one repayment required per week or month.

There appears to be three ways to create a consolidated loan:

• 0% interest credit card:
  • this is where the client transfers debt to a new credit card (and usually all other banking to that bank) and receives 0% interest or a low interest credit card for 6 -12 months
  • this approach requires discipline as additional purchases will attract a very high interest rate as will any part of the debt not paid off within the required time frame.
• fixed rate personal loan
  • this is offered by banks, finance companies, peer-to-peer (p2p) lending (e.g. Squirrel Money, Lending Crowd)
  • interest rate is based on client’s risk profile and security provided
    • a secured loan will attract interest between 6% – 20%
    • an unsecured loan will attract interest between 12% – 30%
  • these loans can have high set-up and penalty rates.
• revolving credit
  • this uses the equity in a house as security for the loan, so is available only to mortgage holders
  • has the advantage of accessing the low mortgage interest rates
  • needs discipline as clients may be tempted to spend additional equity in the home thus increasing their debt.

Sometimes the financial situation of the client prohibits them from accessing these types of finance.