Not for all borrowers
There are several traps to be aware of for borrowers considering this loan type.
For instance, a lender will usually require collateral for a debt consolidation loan, which means borrowers have to put up one of their assets – like their home – as security. If the borrower then defaults on their loan, they could end up surrendering their home to the lender.
The other thing to be mindful of is whether or not the loan would actually work out cheaper.
Sometimes fees and interest are more than regular home loans, so it’s worth using a calculator to do the sums on whether merging debt would result in a net saving.
For example, instead of paying off a credit card over a few months, the debt may be extended over a few years, which could result in a higher overall amount of interest paid.
Finally, it’s important to be sure debt consolidation home loans are being offered by a trusted lender. According to MoneySmart, some companies encourage borrowers to sign up for loans that are unnecessary for their types of debt and which could end up increasing their financial strain.
It’s important to make sure any loan is fit for your purposes.
As with any loan type, there are pros and cons to debt consolidation home loans. For some, it could reduce costs and improve simplicity, while for others it won’t be suitable.