The term debt consolidation refers to the practice of refinancing multiple, separate debts using a single loan. The most common use of debt consolidation is to cut the cost of maintaining debt.
For example, expensive debts with high interest rates such as credit card debts, personal loans and private loans could be consolidated using a low-cost mortgage with a low interest rate. In this case, the money obtained through the mortgage would be used to repay the expensive debts in full. If the new loan has the same term as the existing loans but has a lower interest rate, this form of debt consolidation can cut the cost of debt and make it easier to pay off.
Debt consolidation may also be used to reduce the size of individual loan repayments by refinancing loans with a different loan which has a longer loan term. For example, if a borrower is unable to meet monthly repayments for their loans because the required payments are too high, they may consolidate their loans using a long-term loan with lower monthly repayment requirements. In this case, the debt consolidation may work out more expensive than keeping existing loans because interest is charged over a longer term.
Before consolidating loans using a single, new loan, it is important to understand the full cost of the new loan and the full cost of your existing loans so that you can make an accurate comparison. You can easily find the full cost of a loan using the moneyland.ch loan calculator.
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