It's Quick But Costly To Consolidate Debt

The Age

Monday February 12, 1996

Mark Fenton-Jones

CONSOLIDATING several loans into one is often viewed as an efficient way of organising personal finances. One loan repayment a month is better than juggling different repayment dates or various lenders. Or is it? Say you took out a $10,000 personal loan a year ago for five years, at 13.5 per cent. You want to borrow an additional $5000. Do you borrow it as a separate loan or borrow a larger amount and pay off the first loan at the same time? We'll assume that you have looked at other loan providers and decided to stick with your existing bank which will charge you 13.5 per cent on a five-year loan.

At the end of the first year, the principal owing on the first loan is $8498.12. If you continue making repayments, you will pay a further $2546.58 in interest over the remaining four years. If you consolidate the $8498.12 owing on the first loan, with the $5000 you want to borrow, the total is of $13, 498.12. At 13.5 per cent over five years, the total interest paid will be $5137.21.

If you borrow the $5000 separately for five years, the interest will be $1902.95. The total interest paid when the loans are taken out separately will be $4449.53. Reason: the first loan was for five years. When consolidated at the end of year one, it is rolled over into a new five-year loan, hence the extra interest paid. By keeping the loans separate you save $687.68.

© 1996 The Age

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