Can You Consolidate Personal Loan Debt Against Your Home Loan?
Personal loan interest rates tend to be higher than home loan rates, so you might be wondering if consolidation might be the key to spending less on interest costs.
If you’re paying off a personal loan on top of your mortgage (and maybe even other types of credit like a credit card or car loan), there may be times when it can seem overwhelming.
This could be because each credit product likely has different repayment amounts, due dates, fees, and interest rates.
So, since home loans tend to offer the lowest interest rates, is it possible to consolidate personal loan debt against your home loan to simplify your repayments and save on interest?
While it’s technically possible to do this by refinancing your home loan, it’s important to weigh the potential risks and rewards first.
Benefits of consolidating your personal loan debt on your home loan
- Possibility of saving on interest charges
You could potentially save money on interest charges, but only if you pay off your personal loan debt within the initial period.
For example, if you had three years left on your personal loan, you would need to continue paying off the debt for three years after the consolidation in order to actually save money on total interest charges.
This would likely mean making additional repayments on top of your new mortgage payments for the duration of the original personal loan term.
- Simplified reimbursement process
Consolidating multiple credit products into one debt can help make your repayments more manageable. Instead of having multiple refunds due on different dates, you will only have to worry about one. It can also help minimize your risk of missed payments and being stung by late payment fees.
- More affordable reimbursements
With lower interest charges and fewer fees to pay, you might want to consider more affordable repayments, even if you stick to paying off your personal loan debt over the initial term of your loan. This could give you more leeway in your budget.
Risks of consolidating your personal loan debt on your home loan
- Pay more in total interest charges
Perhaps one of the biggest risks of consolidating your personal loan debt on your home loan is the possibility of paying more money in interest over the life of the loan. This is possible because the term of personal loans is usually around three to five years, while the terms of home loans can last from 25 to 30 years.
If, for example, you’re five years away from your 25-year mortgage term, you still have 20 years left. So if you refinance another 20-year mortgage to consolidate and neglect to pay off all of the personal loan debt within its original repayment term, you’re basically paying it off over 20 years – interest and everything.
- Be hit by unexpected charges
Depending on the type of personal loan you have, you might face prepayment and exit charges if you terminate the loan in order to consolidate it. Be sure to check what types of fees may be owed and factor them into your calculations when determining how much you could actually save by consolidating.
What alternatives are there?
If you think the risks of consolidating your personal loan debt on your home loan outweigh the benefits, or if you just want to weigh all your options before deciding on your next move, it may be worth considering these alternatives. :
- Personal debt consolidation loan
If you have more than one form of credit in addition to your home loan, you may want to consider combining them while leaving your home loan separate. A personal debt consolidation loan allows you to consolidate credit products such as other personal loans, car loans, and credit cards into one personal loan.
Opting for this alternative could allow you to simplify the repayment of your debts and limit the expenses of interest and ongoing charges, while avoiding some of the risks associated with consolidating your mortgage. Keep in mind that a personal debt consolidation loan comes with its own set of potential risks and rewards, so it’s important to assess them as well.
- Refinance your personal loan
If the interest rate on your personal loan is your primary concern, you may want to consider refinancing a more competitive personal loan product, especially if you have been successful in improving your credit score since you originally took out the loan. Just be sure to pay attention to the length of the loan you’re signing up for, because if you extend your current term, you could end up paying more in total interest charges.