Many people have debts all over the place costing a small fortune in monthly payments. The interest rates on these store cards, credit cards, loans for new furniture and other loans all probably seem very high. Looking at a mortgage interest rate, that is a lot lower. It might look appealing to consolidate all of these debts into just one place with a second mortgage.
Upfront interest loans
But, it is not always a good idea. Take a car loan from a car salesroom. With this sort of loan, which includes any other loans calculated using the same method, there is probably no benefit at all in moving the loan to anywhere else.
The problem is that for a lot of car loans the interest is calculated on day one of the loan and then added to the total amount borrowed. Therefore, whether you pay off the loan over the agreed timespan or pay it all off tomorrow, you are still paying the same amount of cash in the long term.
If you were instead to move this debt to a mortgage, in which the interest is calculated daily, then you would be paying an extra chunk of interest on top of what you are already being charged. So for this sort of loan you are probably best leaving it alone and paying it off in the longest time that you are allowed.
Daily interest loans
With credit cards, store cards and bank loans your interest is calculated daily, monthly or at least regularly. As you make payments against the loan your interest charges reduce. So paying off the loan or moving it to a lower interest loan is likely to be money saving.
However, if you move a credit card with a high interest rate, which will be paid off in a short term, to a mortgage with a lot lower rate that will be paid off over decades, although your weekly repayments might benefit, you might find that your total repayments are going to increase drastically.
It is a very difficult calculation to make and one that if you are looking to make the move you must take seriously.
By John Hester