Consolidate over Spending

Debt consolidation

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Consolidation of debt or over spending potentially may be a very effective way to reduce your monthly total payments where by you have exchanged more expensive types of lending for example car loans, credit cards, store cards, personnel loans and

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overdrafts all to one lender with a far lower interest rate. This would normally be done by re mortgaging and raising capital to pay off all the lenders in one go. Due to the recent large increase in house prices more people have equity in their property which they may wish to free up. Servicing your debts is simpler and easier to control all under one lender. This can amount to making huge monthly saving but caution should be taken before consolidation as there are some potential drawbacks that can be associated with consolidating these types of debts.

Debt consolidation drawbacks (Equity release capital rising)

To place all this debt on to a residential mortgage would mean converting shorter term unsecured debt into long term secured debt. This would reduce the equity within the property and weaken the borrowers position of financial stability because if the borrow was struggling to service the debt they could potentially lose their home. If they struggled to service the unsecured debt they may not necessarily lose their home be instead have an arrangement with the creditors to pay off the debt over time on an agreed fixed monthly amount.

Caution should be taken with consolidation as there may be high existing penalties for redeeming the loan or debt early. Some people have fallen into the trap of thinking that they can continually borrow because of the rising equity in their property. This is a dangerous habit, a borrower should never borrow more than they can realistically afford. Financial discipline and caution should be taken in order to control finances and obtain sound money management.

The borrower may only have a short time to pay off loans and credit cards but consolidation would mean greatly extending the term. And the longer a lender keeps a borrower within a lending term the more money they will make from interest payments. However this can be managed if the borrower makes regular over payments and lump sum payments to reduce the term of the loan, they will save money by reducing the total interest paid. This will buffer to some degree the affect of extending the term of originally unsecured debt.

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