What's wrong with consolidation?

richardvc

JA1000 wrote: »

99% of us out there probably wouldn't have a house without a mortgage so should we all save up to buy a house?

The reason we have a mortgage is that we need somewhere to live - it is a necessity to get our hands on a large amount of cash to buy a house.

Whereas, generally, consolidation is used to pay for unnecessary items or us living beyond our means.

Personally, I think in rare circumstances, it can work really well for some people BUT only if they are a) disciplined, b) won't let the mortgage run its full term (as it's expensive) and c) have a real financial plan.

On the whole, I think it is a very expensive way to service debts 'cos it sure ain't paying them off !!

richardvc

kilgore1080 wrote: »

paid everything off that I owed

Whilst I agree with your post, the above isn't correct. You just changed who you owe the money to - none was paid off.

katsu

JA1000 wrote: »

I totally agree, but after reading these forums anyone in a similar situation to me could be under the impression that under no circumstances should you consolidate. There are people out there for whom it is the sensible way out and this point needs to be put across hence the thread.

Consolidation is NOT bad if used for the correct circumstances, I don't want those sensible people out there to be lulled into thinking it is bad. I couldn't find a thread to say it is ok to do and thought this cannot be right.

Some of the responses on here still clearly say it is a bad idea, well it isn't and each circumstance has to be looked at and not an immediate NO.

If I've understood your sitation properly it is not the situation most people (probably 99% of those who consolidate) are in. You are able to justify your decision to yourself (in quite a convincing way) and your description of events suggests you do not generally overspend (I presume you had £0 debt before?)

The majority of people who ask about consolidation have "living beyond their means each month" debt and consolidation is dangerous for them as they will risk continuing to live beyond their means. Consolidating debt onto a mortgage means a higher mortgage payment which means if your income drops you risk loosing your house.

Just because you say your situation is not like that, does not make it wrong for the starting point to be advising aganst consolidating.

We purchased a trashed house - no kitchen, no working lights etc and we did the minimum amount of necessary work to move in. I now have no debt but no carpets and lots of interior work needs doing. Some people may have used debt to fund works on the house - personally I would advise against incurring debt for any non-essential work. For the first 12-24 months we could not use the front door as it was so damaged. We sealed it up and used the back door until we had cash for a replacement.

Horses for courses. Just accept for most people consolidation is a risky move and maybe your circumstances are uncommon?

JA1000

Difference was your house was habitable in one shape or another, unless it's signed off by the local authority it is worth considerably less.

This was caused by the mismanagement at RBS who have continued to prove very unhelpful!

I completed by using other means, I am glad I had those other means or the banks would have probably forced sale on a building site!! Two years hard work gone!!

Willow_K

I agree with both sides.

Consolidation in itself isn't a bad thing - we will hopefully be consolidating around 27K of debt onto our mortgage within the next couple of months - this debt is not credit cards but a couple of personal loans that were taken out when our business was in trouble and I was on maternity leave.

Our business is now in a better position due to some drastic changes that were made and I have been promoted at work and am earning more and by consolidating it means we can have the debt paid off in around 2 years instead of 18 years (paying around 0.95% interest as opposed to 9.9% interest).

For us, consolidating actually also puts us into a more secure position - should the business get into trouble without the consolidation, we would never be able to afford to pay the £600 a month repayments, however, we would be able to afford to repay the extra £100 (and a bit more should interest rates go up) a month the additional debt would put on our mortgage.

However, we are comfortable doing this because we did not run up the debts due to living beyond our means and are unlikely to run those kind of debts up again - we also in fortunate position of having around 50% equity in our property and an extremely good mortgage deal.

I can however, completely understand the advice that is given to people who have thousands on credit cards and nothing to show for it and who have that kind of debt just because they are living beyond their means - when they first have their LBM consolidation would be financial suicide! It might be an option a couple of years into a DMP when they have learnt to live within their means - although by then their credit score is likely to be trashed anyway.

It sounds like you are in a similar situation as us, and I agree, consolidation is probably the best option, but for most of the people who come on this board it is a very very bad idea.

DVardysShadow

JA1000 wrote: »

It was the twist and turns of the market which made me look at an uncomplete building site when RBS kindly pulled the plug.

I had to make the call to fight for funding, which now looking back would never have happened so I am glad I didn't waste my time. They were so scared of their own liquidity they blocked further lending.

I had no choice and reached for my empty credit cards, as I paid for supplies for the build to be finished I also did some swapping and had some running at 0%.

Although I maxed out the CCs at least I finished building the house, now I am looking to consolidate to where that money should really be, on the mortgage.

This is the reason why consolidation is NOT always a bad thing. Right now for the first time I am pouring money in to massive CC interest which leaves me unable to make significant payments of my mortgage.

I don't think what you are proposing is true consolidation. In effect, you were disenfranchised from mortgage finance and you have CC debt as the fallout. Now you want to convert CC debt into mortgage debt, which is sound enough.

Now the reason for not having secured mortgage debt is that it puts your home at risk. It is quite sane to use mortgage debt however, to buy a home, because it only puts at risk the home you wouldn't have had if you didn't have a mortgage. If your circumstances change and you lose your home because you defaulted on the mortgage, you have to say 'c'est la vie' [that's life] and be grateful for the time you did have a home. But beyond that, it is foolish to borrow for things other than the home, for example flashy car, expensive holiday, particularly with secured finance - unless you can look back and say 'je ne regret rien' [I don't regret nothing] if the memories of the holiday outweigh the loss of your home.

In your case, JA1000, your debt is plainly for your home. It makes sense to consolidate. But for others, it is often a big mistake. Part of the reason is that consolidation finance is falsely sold. When you are being sold a consolidation loan, you are lured with the [false] prospect of being debt free and the consolidation cheque is handed over with congratulations for being debt free. So those who consolidate often make the mistake of believing the false prospectus and then they go out and run up the card debt again. It doesn't take the consolidation lender long to turn round and remind you that you owe them...

There are those here for whom a consolidation loan, perhaps for only a part of their debt, would make mathematical sense. But because a consolidation loan inevitably comes with a false prospectus, it equally inevitably does not make logical sense to advise the consolidation loan when the consequences are that the person will just go out and spend on the cards again and have a debt problem twice as big.

There are a few people who could resist the false prospectus of the consolidation loan, who would be able to use the loan to resolve their finances. Mostly, they tend to be able to work it out for themselves without needing advice from here. JA1000, I would class you among those people.

There is always a blind spot concerning consolidation loans. In your case, I believe that your eyes are fully open to the dangers - your blind spot is the emotional appeal of the false prospectus that a consolidation loan makes you debt free [which of course it doesn't]. Most people are all too open to the false prospectus and blind to the dangers. You are of course mathematically correct, but logically wrong, because of the emotional aspect.

JA1000

So to pick up on the last comment in the last post.

Would everyone agree with

"You are of course mathematically correct, but logically wrong, because of the emotional aspect."

This to me summarised that debt consolidation is not wrong and will actually save money if repayments can be made at the level they were before. The problem we see all over the forums is that when they think the debt is clear i.e. from the cards the spending starts again.

Oneday77

Consolidation is only right in one instance. That being that the unsecured debt that needs consolidated into a secured form of debt is not due to irresponsible spending. As long as you have no underlying problems with running debts for materials gains then your fine.
By material gains I mean upgrading the kitchen as you don't like the old one. Completing the sale of a house due to circumstances out with your control and an entire financial system failing aroung your ears, would qualify I would say.

I have tried the consolidation several times for my own short comings, I know it doesn't work. In your case even I couldn't screw it up. There is only one must, ditch the CCs even if you don't have a spending issue.