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<p>Consolidation loan or the concept of debt consolidation in general is a process of taking one single loan to replace multiple loans or a loan with high interest rate (for example credit card debt). This can effectively help to reduce total cost from high interest rate or finance charge.</p>



<p>As mentioned previously, consolidation loan is useful for replacing one or multiple high interest loans which may include:</p>



<ul><li>Finance charge on credit card debt (if you do not pay credit card on time)</li><li>Finance charge on credit card cash advance (if you withdraw cash using credit card and do not pay on time)</li><li>Overdraft facility</li></ul>



<p>Interest expense from these types of borrowing can be high as they tend to have high interest rate (up to 30%+ APR) or their finance charges accrue on a daily basis.&nbsp;</p>



<h3><strong>Benefits of consolidation loan and who it is suitable for</strong></h3>



<p>In general, consolidation loan provides the following benefits:</p>



<ul><li><strong>Reduce total interest expense and finance charge</strong>. Given total loan repayment amount is a combination of principal and interest expense, this will help to reduce overall loan repayment so that you can pay off your debt earlier or reduce burden on your monthly cashflow</li><li><strong>Simplify payment process</strong>. Keeping track of and paying for a single loan is simpler than doing so for multiple loans. More importantly, it also reduces the risk of missing repayment (which can help you to avoid various finance charges)</li></ul>



<p>Consolidation loan tends to have lower interest when compared to other more expensive types of borrowing listed above. So how do you know if consolidation loan is right for you?</p>



<ul><li>You are paying for one or more high interest loans</li><li>You still have a good enough credit score to qualify for loan with lower interest than your current ones</li><li>Your cashflow in the next 12 &#8211; 36 months will allow you to pay off the new consolidation loan</li></ul>



<h3><strong>Illustration of how consolidation loan can benefit you</strong></h3>



<p>In this example, we will be looking at a consumer who is paying for one credit card debt and one overdraft facility every month, however both loans are accruing interest on a daily basis.</p>



<figure class="wp-block-table"><table><tbody><tr><td><br></td><td><strong>Credit card debt</strong></td><td><strong>Overdraft facility</strong></td></tr><tr><td><strong>Outstanding balance</strong></td><td>HK$40,000</td><td>HK$150,000</td></tr><tr><td><strong>Interest</strong></td><td>25% APR accruing daily</td><td>15% APR accruing daily</td></tr><tr><td><strong>Current monthly repayment</strong></td><td>~HK$7,170</td><td>~HK$9,370</td></tr><tr><td><strong>Total interest expense</strong></td><td>~HK$3,000</td><td>~HK$18,550</td></tr><tr><td><strong>Est. time until total repayment</strong></td><td>6 months</td><td>18 months</td></tr></tbody></table></figure>



<p>Following the above calculation, this consumer is spending HK$16,540 in loan repayment every month. It will take about 18 months for all debt to be paid back and total interest expense during this period will be HK$21,550.</p>



<p>If this consumer is to take a consolidation loan of equal balance with similar monthly repayment amount however, the consumer will be able to reduce interest expense as well as become debt-free sooner.</p>



<figure class="wp-block-table"><table><tbody><tr><td><br></td><td><strong>Existing loans</strong></td><td><strong>Consolidation loan with 10% APR which accrue monthly for 12 months</strong></td></tr><tr><td><strong>Balance</strong></td><td>HK$190,000</td><td>HK$190,000</td></tr><tr><td><strong>Monthly repayment</strong></td><td>HK$16,540</td><td>HK$16,704</td></tr><tr><td><strong>Total interest expense</strong></td><td>HK$21,550</td><td>HK$10,450</td></tr><tr><td><strong>Est. time until total repayment</strong></td><td>18 months</td><td>12 months</td></tr></tbody></table></figure>



<p>This example illustrates how consolidation loan can help a consumer who is paying for multiple high interest loans by reducing total interest expense and repayment timeline while keeping a similar level of monthly repayment amount.</p>



<p>*Note: calculations above follow a standard formula and may differ from calculations used by financial institutions</p>



<p><strong>Things to watch out for before taking a consolidation loan</strong></p>



<p>While the benefits of taking a consolidation loan can be quite clear, there are still a few things to take into consideration:</p>



<ul><li>Like any other types of loan, consolidation loan requires timely repayment. Missing of payment can lead to additional interest and finance charge&nbsp;</li><li>If high monthly repayment will place a burden on your cashflow, consider a consolidation loan with longer repayment (Although this will lead to higher overall interest expense. Read more about the relationship between repayment plan and total interest expense <a href="https://www.planto.hk/en/blog/personal-loan-interest-rate-factors/">here</a>)</li><li>If your existing loans’ outstanding balances are small enough and you have enough saving for emergency situations, paying off the loans or making early repayment could be a better alternative than consolidation loan (However do watch out for early repayment fee)</li></ul>



<p>It is advisable that you do research and plan ahead of any borrowing. If you are looking for more resources around borrowing, feel free to visit the <a href="https://www.ifec.org.hk/web/en/moneyessentials/debts-and-borrowing/index.page">Investor and Financial Education Council</a> or the Chin family’s website.</p>



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<h4>Recommended Readings</h4>



<ul><li><a href="https://www.planto.hk/en/blog/overseas-mortgage-interest-expense/">Can personal loan in Hong Kong reduce your mortgage interest expense?</a></li><li><a href="https://www.planto.hk/en/blog/living-cost-hongkong-bangkok/">Hong Kong vs. Bangkok, from a Thai person living in Hong Kong</a></li></ul>



<p></p>


Consolidation loan or the concept of debt consolidation in general is a process of taking one single loan to replace multiple loans or a loan with high interest rate (for example credit card debt). This can effectively help to reduce total cost from high interest rate or finance charge.

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