Many families reach a point where they have a car loan, a bank loan, installment purchases on a credit card and an overdraft, each with a different rate and a different charge date. Loan consolidation replaces all of these with one loan, usually at a lower rate.
Three main ways
- A consolidating loan from the bank – one consumer loan that pays off all the others.
- An any-purpose mortgage – for homeowners: a loan secured by the apartment, at a low rate and for a long term. Any-purpose mortgage
- Increasing an existing mortgage – as part of refinancing. When to refinance
How do you calculate whether it pays off?
Compare not only the monthly payment, but the total of all payments until the end:
- How much are you going to pay on all the existing loans until they end?
- How much will you pay on the consolidating loan, including fees?
An example: three loans totaling NIS 120,000 at an average rate of 9% over 5 years – a payment of about NIS 2,490. Consolidating into an any-purpose mortgage at 5.5% over 5 years: about NIS 2,290, and savings of about NIS 12,000. But if you spread the same amount over 20 years, the payment drops to about NIS 825, while total interest grows to about NIS 78,000, more than 2.5 times the interest on the original loans.
The big danger
Loan consolidation frees up money every month, and that feels like relief. Without a change in habits, after a year or two you are back in overdraft, but this time also with the consolidating loan.
How to do it right
- A full map – all the loans, rates, fees and balances.
- Checking the early repayment fees on the existing loans.
- A new budget – one that ensures you do not go back into overdraft. Building a family budget
- The shortest possible term – do not stretch it just to lower the payment.
More: getting out of overdraft, non-bank loans.