The risks of consolidating
Getting a new loan or varying an existing loan to pay out a number of other loans comes with some risk. Some of the key ones are listed below.
Longer to pay off
The main downside of a consolidated loan is that it usually takes much longer to repay - and that means it may cost more in the long run.
Fees, charges and interest rates
Make sure that you check the fees, charges and interest rate of the new loan – it may work out more expensive in the long run, rather than if you kept paying off your multiple debts.
Unsecured into 'secured'
Before you turn all your unsecured debts (such as credit cards) into a secured debt, remember that the asset given as security (for example, your home) will be on the line if things go wrong. You may also be turning short term debt into long term debt. If your home is jointly owned with someone else, you may have to pay the debt if they can't.
If you're ahead with your mortgage payments, you may be able to re-draw against the mortgage to pay out loans with a higher interest rate. It's important you do the sums as it may work out to be more expensive, since you'll pay back the home loan over a longer period of time and therefore pay more in the long run.
If you're not ahead on your mortgage, increasing it by adding other debts would need to be thought through carefully as you may end up paying more money in the long term.
Only one lender to negotiate with
When you consolidate into one loan you will have only one lender. If you get into financial difficulty again, you can only negotiate with them.
'Government backed schemes' (Part IX Debt Agreement)
Beware of debt consolidation that is actually a Part IX Debt Agreement under the Bankruptcy Act. These debt agreements often mention one payment and a government backed scheme. Debt Agreements have serious consequences and are usually expensive. Always see a financial counsellor before you consider a Debt Agreement.