Learning how to consolidate debt is one of the most important financial tools you can have in your arsenal. The reason why this is so important, is that you could be saving thousands of dollars just by making a few simple phone calls or by sitting down with a financial expert who understands your financial situation.


What is Debt Consolidation

So what is debt consolidation? Debt consolidation is the process of gathering up all your existing debts or loans and combining them into a single loan with a new interest rate. The goal of debt consolidation is to get a lower interest rate with your new loans so that you don’t have to pay as much money back each week or month. Simple Right?

Consolidate Debt

How to Consolidate Debt

There are a lot of differing opinions when it comes to debt consolidation and how best to go about it. I personally think the best way forward is to reach out to a financial advisor and tell them about all of your existing loans and how much money you have to repay for each one. They should be able to guide you to a local financial institution that will be able to look after your needs and combine your debt into a more manageable package.

You will also need to find out all the details about your existing debt commitments as there are many things you have to watch out for before signing up to consolidate your debt.


It seems that no matter the financial product these days there are fees attached to it. One of the common fees that people encounter is early exit fees on mortgages, extra repayment fees and yearly account or card fees just so you can have the privileged of access to the debt facility. Be sure to calculate fees when considering migrating all your debt into a single loan.

Interest Rates

Remember that the goal of your debt consolidation is to save as much money as possible, so normally the best way of doing this is to find the lowest interest rate possible (preferably also with the lowest fees). The majority of people considering consolidating their debt are suffering because of high interest rates. A 1% difference in interest rates might not sound like much, but over the long term it can add up to a lot of money.

Introductory Periods

Another trick that is commonly used by unscrupulous financial vendors, is to offer you sweetheart entry deals where you get a great interest rate for the first 1 or 2 years. The problem with these types of loans is that normally after the introductory period is over, the interest rate reverts to some monstrous rate far bigger than you ever expected. The way around this is to make sure you read the fine print on any products offered to you as a solution to your debt problems and be skeptical of deals that seem too good to be true.

Lock-in Periods

Another common tactic is for financial lenders is to offer people a debt consolidation facility provided that stay with that financial services provider for a fixed period of time, but if you decide to leave them you will incur a large fee that makes it financial suicide to leave. If you enter into a loan that has a lock-in period, be 100% sure that you are comfortable with the terms and know exactly how much if will cost you to break out of the fixed term.


Saving Money with Debt Consolidation

Let me give you a quick example of how much money you could save to help you better understand how a debt consolidation loan can be of benefit to you.

Say you have the following debts:

  • Car Loan – $20,000 @ 6.5% = $1,300
  • Credit Card – 15,000 @ 9% = $1,350
  • Personal Loan – $12,000 @ 7% = $840

That is a total of $3,490 a year in interest repayments (not including any fees)

Now if you were to consolidate those loans into a single $47,000 ($20,000 + $15,000 + $12,000) loan at an interest rate of 6.5% you would have the following debt and repayment amount:

  • $47,000 @ 6.5% = $3,055

That means that instead of paying $3,490 in interest per year, you now only have to pay $3,055. This leaves you with an extra $435 per year to play with, that’s more than a 10% saving! Obviously the example I gave is very simple, but it does demonstrate how easily you can start to save money by consolidating your debts.


VERY IMPORTANT – The trick with all of this is that you need to be adding a good portion of the extra money that you are saving back into the loan as additional repayments. If you don’t do this then you may end up paying more overall due to the longer term on the new loan.


Getting Debt Consolidation Help

I recently read Dave Ramsays views on debt consolidation on his website. I mention it because I think he is completely wrong with his advice on the topic. His article states that people shouldn’t take on debt consolidation loans because you will end up paying more in the long run. He assumes that all people must be financially inept, and that they won’t add any of the extra money they are saving back into the loan as extra repayments. I honestly expected better from someone who professes to be a personal finance guru.

What he should have said is that you need to put the extra money you are saving back into the loan, so that way you can pay it off more quickly and reduce your overall debt burden.

He also stated that people need to change their lifestyle and their spending habits or they will never be free of debt. I couldn’t agree more – people should change their lifestyle if they find themselves in this situation. What also helps is not having to pay back as much interest when you don’t have to. A great way to do that is to consolidate debt as part of a good debt management solution.

My thoughts – don’t listen to Dave Ramsay (at least on this topic), instead, go talk to a qualified financial advisor about your debts. They will be able to provide you with sound counsel in regards to your own personal financial situation and set up a workable debt management plan tailored to suit your individual requirement.


Readers – What are your thoughts?

Have you ever consolidated your debts and did it work out for you?