Debt Consolidation

Nick_K

Hello everyone,

I have read an awful lot of negative comments towards the idea of taking out a loan in order to consolidate debt. For the most part it makes sense to me, if you borrow money at a lower interest rate, you will still probably pay more as the term likely wouldn't justify the reduction in interest. In my mind though, there has to be situations where this sort of consolidation would be useful. Let's take my partner's situation for example:

£162.73	34.90%	£6,834.66	20.12.23
£157.80	22.90%	£1,104.60	20.01.21
£195.53	93.60%	£2,346.36	30.07.21
£150.90	7.30%	£4,965.85	01.05.21

Above are the monthly payments, interest rate, left to pay figure and end date. If she was to continue with these loans to completion, the overall repayment from today would be £15,251.47, paying £666.96 per month.

Now the early settlement fees for each are:

£4,335.81

£1,062.23

£2109.34

£4,672.75

Giving a total settlement value of £12,180.13. Now let's say that she is able to get hold of a fixed rate loan at 3.5% for £12,180.13, which she uses to pay off all of her existing debts. She is now left with a single loan with a total repayable value of £12,532.78, paying £659.62 per month and even have the loan repaid sooner than 1 of the loans above. This could even be extended to 5 years, slashing her monthly payments to £221.28 and still coming in at £13,276.80. 
£15,251.47 - £12,532.78 = £2,718.69 better off
or
£15,251.47 - £13,276.80 = £1,974.67 better off

This is a hypothetical, and I am fully aware that many people who have wound up in this position would not have the option of taking a new loan with such a rate, so please leave that at the door. What I'm looking for here is someone to check my thinking above and tell me if there is something I have missed. In most scenarios, consolidating would not be the cost effective solution, though in the scenario above it certainly would be, right?

Thank you for your time.

[Deleted User]

If you can get lower rate lending and pay off the original debts and address the cause of the original overspending and maintain the same level of payments, then you'll benefit.

It's just that there's normally too many conditional clauses for those who are looking to consolidate.

[Deleted User]

Nick_K said:

Hello everyone,

I have read an awful lot of negative comments towards the idea of taking out a loan in order to consolidate debt. For the most part it makes sense to me, if you borrow money at a lower interest rate, you will still probably pay more as the term likely wouldn't justify the reduction in interest. In my mind though, there has to be situations where this sort of consolidation would be useful. Let's take my partner's situation for example:

£162.73	34.90%	£6,834.66	20.12.23
£157.80	22.90%	£1,104.60	20.01.21
£195.53	93.60%	£2,346.36	30.07.21
£150.90	7.30%	£4,965.85	01.05.21

Above are the monthly payments, interest rate, left to pay figure and end date. If she was to continue with these loans to completion, the overall repayment from today would be £15,251.47, paying £666.96 per month.

Now the early settlement fees for each are:

£4,335.81

£1,062.23

£2109.34

£4,672.75

Giving a total settlement value of £12,180.13. Now let's say that she is able to get hold of a fixed rate loan at 3.5% for £12,180.13, which she uses to pay off all of her existing debts. She is now left with a single loan with a total repayable value of £12,532.78, paying £659.62 per month and even have the loan repaid sooner than 1 of the loans above. This could even be extended to 5 years, slashing her monthly payments to £221.28 and still coming in at £13,276.80. 
£15,251.47 - £12,532.78 = £2,718.69 better off
or
£15,251.47 - £13,276.80 = £1,974.67 better off

This is a hypothetical, and I am fully aware that many people who have wound up in this position would not have the option of taking a new loan with such a rate, so please leave that at the door. What I'm looking for here is someone to check my thinking above and tell me if there is something I have missed. In most scenarios, consolidating would not be the cost effective solution, though in the scenario above it certainly would be, right?

Thank you for your time.

1) Someone with existing loans with those horrific interest rates is unlikely to get a decent rate like 3.5% APR. 

2) Consolidating doesn’t deal with the underlying budgeting issue.  Plenty of people on the debt free wannabe board can attest to that! 

Ebe_Scrooge

Yep - in the example you've cited, it would make sense.  As an aside, that 3rd one at 93.6% ???!!!!!

The problem is going to be firstly getting a loan at a half-decent rate - the lender can't guarantee you'll use the loan to pay off your existing debts, they have to assume the worst-case scenario whereby you blow the loan on a holiday and simply end up with twice the debt, which you'll be unable to service.  So you're unlikely to be offered a loan at all, or it you are it will be at a pretty high APR.  Secondly, even if you can get a loan at a reasonable rate, and you do use it to clear the debts - the temptation, if you're not careful, is to simple rack those debts back up again, leaving you again in the situation where you've got double the debt.

So yes, in theory it's a fine idea, but in practice it rarely works out as planned.

< Edit - cross-posted with ZX81 who put it so much more succinctly :-) >

DCFC79

As pointed out its pointless doing consolidation (which I don't think will happen in this case anyway for reasons mentioned) if the route cause isn't sorted.

All depends what the loans were for.

Nick_K

Lover_of_Lycra said:

Nick_K said:

Hello everyone,

I have read an awful lot of negative comments towards the idea of taking out a loan in order to consolidate debt. For the most part it makes sense to me, if you borrow money at a lower interest rate, you will still probably pay more as the term likely wouldn't justify the reduction in interest. In my mind though, there has to be situations where this sort of consolidation would be useful. Let's take my partner's situation for example:

£162.73	34.90%	£6,834.66	20.12.23
£157.80	22.90%	£1,104.60	20.01.21
£195.53	93.60%	£2,346.36	30.07.21
£150.90	7.30%	£4,965.85	01.05.21

Above are the monthly payments, interest rate, left to pay figure and end date. If she was to continue with these loans to completion, the overall repayment from today would be £15,251.47, paying £666.96 per month.

Now the early settlement fees for each are:

£4,335.81

£1,062.23

£2109.34

£4,672.75

Giving a total settlement value of £12,180.13. Now let's say that she is able to get hold of a fixed rate loan at 3.5% for £12,180.13, which she uses to pay off all of her existing debts. She is now left with a single loan with a total repayable value of £12,532.78, paying £659.62 per month and even have the loan repaid sooner than 1 of the loans above. This could even be extended to 5 years, slashing her monthly payments to £221.28 and still coming in at £13,276.80. 
£15,251.47 - £12,532.78 = £2,718.69 better off
or
£15,251.47 - £13,276.80 = £1,974.67 better off

This is a hypothetical, and I am fully aware that many people who have wound up in this position would not have the option of taking a new loan with such a rate, so please leave that at the door. What I'm looking for here is someone to check my thinking above and tell me if there is something I have missed. In most scenarios, consolidating would not be the cost effective solution, though in the scenario above it certainly would be, right?

Thank you for your time.

1) Someone with existing loans with those horrific interest rates is unlikely to get a decent rate like 3.5% APR. 

2) Consolidating doesn’t deal with the underlying budgeting issue.  Plenty of people on the debt free wannabe board can attest to that! 

1) I already addressed this in my post.
2) I completely understand that, and a change of behaviour is absolutely critical in ensuring that this is paid off and does not happen again. Again though, I was simply asking if the math made sense. 

Thank you for taking the time anyway.

Nick_K

DCFC79 said:

As pointed out its pointless doing consolidation (which I don't think will happen in this case anyway for reasons mentioned) if the route cause isn't sorted.

All depends what the loans were for.

Again, the purpose of this post was to check the theory. Hence my disclaimer.
Thank you for taking the time though.

onlyfoolsandparking

I think the math makes perfect sense and if you can get the loan at a decent apr then go for it, whilst I agree with peoples sentiment about consolidation loans, I cant believe that EVERYONE who has taken one ends up worse off!

DCFC79

Nick_K said:

DCFC79 said:

As pointed out its pointless doing consolidation (which I don't think will happen in this case anyway for reasons mentioned) if the route cause isn't sorted.

All depends what the loans were for.

Again, the purpose of this post was to check the theory. Hence my disclaimer.
Thank you for taking the time though.

It wasn't a question that needed an answer from yourself.

She can apply but she needs to understand it might not be possible.

DCFC79

onlyfoolsandparking said:

I think the math makes perfect sense and if you can get the loan at a decent apr then go for it, whilst I agree with peoples sentiment about consolidation loans, I cant believe that EVERYONE who has taken one ends up worse off!

People take out a loan to pay off credit cards, don't close the card/account and carry on spending so the original debt is paid off but a new credit card bill is needing paying.

A loan is taken to pay x and y off but shopping habits don't change and more debt is built up.

As mentioned examples on the debt free wannabe board.

onlyfoolsandparking

DCFC79 said:

onlyfoolsandparking said:

I think the math makes perfect sense and if you can get the loan at a decent apr then go for it, whilst I agree with peoples sentiment about consolidation loans, I cant believe that EVERYONE who has taken one ends up worse off!

People take out a loan to pay off credit cards, don't close the card/account and carry on spending so the original debt is paid off but a new credit card bill is needing paying.

A loan is taken to pay x and y off but shopping habits don't change and more debt is built up.

As mentioned examples on the debt free wannabe board.

Yes but like I'm suggesting NOT EVERYONE.