The Fine Print of Debt Consolidation

I received some junk mail the other day (sorry, unaddressed advertising material, I’d hate to offend anyone) from GE Money. They were selling a glossy, happy, brightly decorated lifestyle change under the guise of a debt consolidation loan. Using terms like “surprisingly affordable”, “life could be a lot easier if you rolled all your debt into a GE Money Debt Consolidation Loan”, “fits your lifestyle” and “enjoy the certainty of fixed repayments” you could be forgiven for thinking these guys were a charity (debt consolidation loans of $2 and more are very rarely tax deductable).


Before you consider rolling all your credit card, car loan and personal loan debts into a debt consolidation loan, please make sure you read the fine print. For a full list of all the conditions you would need to go through the loan paperwork, but the info on the back of the junk mail pamphlet gives you some insight. Using their figures (but not their online inflexible loan calculator, I had to visit a reputable site to crunch the numbers) the minimum loan amount of $3,000 paid off over the maximum 5 years would cost over $1,280 in interest and $850 in fees. So your initial 3 grand loan ends up costing you over $5,130. That’s a lot of money and an awful lot of fees, particularly when one of the selling points they use relates to avoiding multiple fees as a benefit of taking on one of their loans.


GE Money says – “You’ll be surprised how little it could cost you each week!” which, when you read the figures above is another way of saying “You’ll be shocked how much debt consolidation costs you over the life of the loan.”

The interest rate is fixed at a massive 14.99% so you can “enjoy the stability of a fixed interest rate”, but I don’t think you would enjoy it much when you see the Reserve Bank lower official rates.


So if you have looked at consolidating your debts and are now sitting there scratching your head, what is the best thing to do? Start by making extra repayments onto your highest interest rate debt. Pay every spare cent that you have into this loan while making the minimum repayment on all your other loans. When the highest rate debt is paid off, put the money that was going onto it into paying off your second highest interest rate debt (as well as the minimum payment that you had already been making on debt number 2). Keep going until all the debts have been extinguished, then chuck a party to celebrate (nothing too big, you don’t want to end up in debt again!)


If you really knuckle down and make a huge effort to get rid of your debts, you will notice a couple of things. Firstly, the hardest part is the first extra repayment on that first loan. Every subsequent debt will be paid off with increasing speed, probably a lot faster than you thought possible and certainly a lot faster than with a debt consolidation loan. The amount of money you pay in interest gets smaller and smaller, and as time goes on your confidence with your financial situation grows.


And you end up realising just how crazy those debt consolidation loans really are.

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