Debt Consolidation Loans— Repaying Your Debts More Conveniently
Debt consolidation loans are personal loans that make it possible for the borrower to roll different types of debts into a single loan with a single loan repayment and interest rate. This could involve store card debts, credit card balances and other personal loans rolled into a single debt.
This allows the borrower to only have to worry about a single due date so making the repayments on time becomes so much easier. This type of loan offers other benefits such as a lower interest rate and in some cases, you will only be required to pay a single annual fee or even none.
Is It Ideal to Take Out A Debt Consolidation Loan?
This would have to depend on your individual circumstances. However, there are a number of instances when it can be a good idea. This is especially true for situations where you can save a lot of money, time and hassle. For instance:
- If you’re having a hard time keeping up with due dates. The problem with having to pay off multiple debts so keeping track of your respective repayment schedules. With so many dates to remember, it is easy to miss one and that single missed repayment can have dire consequences to your credit record in the future. Debt consolidation loans make it possible for you to get every single credit you have into just one loan. This ensures that there will only be one single repayment date for you to remember, making it easier to keep track of.
- If you have several high-interest rate debts. It’s typical for credit cards to charge you a much higher rate compared to debt consolidation loans. This makes it more expensive to retain a credit card balance than to have that balance rolled into a debt consolidation loan.
- If you’re having a hard time choosing which debt to prioritise. It can get stressful when you have to deal with several debts at the same time. If you‘re having a hard time whether to pay off your credit card or personal loan first then taking out a debt consolidation loan is a great way of simplifying things for you.
- If the benefits of loan consolidation far outweigh the cons. When taking out a debt consolidation loan, note that the term is generally longer— about 3-5 years. When you stretch your debt over a longer repayment period, you will likely end up paying more on interest rate compared to how much your interest rates are before consolidating your debts. It is always best to do the math before making a decision to ensure that you’re making the most out of the benefits that consolidation loans offer.
Will a Debt Consolidation Loan Have a Negative Effect on Your Credit?
As is true with any type of credit, a debt consolidation can pull down your overall credit score, especially if you’re not going to be responsible for your repayments. However, if you see to it that your repayments are done on time, it can actually help pull your credit rating up.
A debt consolidation loan application will always be reflected in your credit history. This will be in the form of a credit inquiry. If the application is successful, the loan will then be reflected as a new credit source under your name. This can have a bad or good effect. A loan can lower your credit utilisation which may be a good thing but it will also have an effect of increasing your overall credit available which can have a potentially negative impact on your record.
In the long run though, getting all your old credit accounts closed and paid off is a good thing. This isn’t just going to reflect positively on your credit records but in your overall financial standing as well.
Why Comparing Debt Consolidation Loans Matter
When you have a number of accrued debts from credit card to card loans, signing up for debt consolidation can be a good thing. This credit instrument can help you get all of your existing debts combined into just one sum and managing one personal loan is definitely so much easier compared to juggling several.
Aside from the upside of having to say goodbye to confusing multiple monthly payments, you will enjoy the benefit of having to pay off just a single payment every month. At the same time, you have the potential to enjoy lower interest rates, especially when you are rolling a number of high-interest loans. The same is true for store card loans that are known to be attached with high interest rates. As a result, you can save more in the long run.
For instance, if you have the following debts under your name:
- A car loan for $20000 with an interest rate of 9%
- A credit card balance of $50000 with an interest rate of 22%
- A store card loan of $2000 with an interest rate of 18%
In this case, the monthly repayments could amount to $899. For a 3-year term, the total interest rate you will have paid is at $5373. Meanwhile, if you choose to roll the debt into just a single loan with 8% interest rate, the monthly repayments will only be $846 and for a 3-year repayment period, you will only pay $3459 for the interest rates. This means that you save $1914 in the process!
Must-do’s When Taking out a Debt Consolidation Loan
Whilst a single cash loan with a low interest rate can help address your current debt woes, it is important to see the big picture before signing up for one. You want to maximise the benefits of a debt consolidation loan if you are to sign up for one. At the same time, you need to be aware of potential traps if you wish to truly address the current state of your finances.
Here are some of the things you definitely should DO:
- Decide on the type of debt consolidation loan to take advantage of
There’s a range of options available out there as far as debt consolidation loans go. You do have to understand how important it is to choose the right one because the wrong choice is only going to lead to you getting buried under even bigger debt. Always take your time to look around and weigh in on the pros and cons of your options. A good start would be to decide whether you would prefer to take out secure or an unsecured credit.
Secured loans. As the name suggests, this is a type of personal loan where the borrower is not required to attach an asset to the loan. This could be in the form of a house or a car that serves as loan security. As a result, the lender will usually respond with more affordable fees and interest rates. The reason for this is that when there’s an asset attached to the loan, lenders will consider you to be a less risky borrower. Do bear in mind that this comes attached with some risk for you. This is because if you fail to make the loan repayments, the lender has the choice to repossess the asset to recoup their losses.
Unsecured loans. It’s common for Australian debt consolidation loans to be unsecured. This means that when you take out a loan, you won’t be required to cough up an asset to secure the credit. This is perfect for borrowers who don’t have any assets under their name or those who aren’t willing to put their home, car, or boat at risk. This does result in you paying higher fees and interest rates compared to how much you normally would if you were taking out a secured loan.
When taking out a debt consolidation loan, you always have the option to go for a variable or fixed interest rate. These are the differences between these two:
Fixed interest rates. This means that for the duration of the loan, you will have a locked interest rate. This offers the advantage of making it easier for you to set a budget for your loan payments because your repayments aren’t going to change for the whole loan term.
Do remember, however, that when making a comparison on which debt consolidation loan set up to go for, avoid those that are attached with hefty break cost fees if you should decide to get the debt paid off earlier than scheduled. Bear in mind that fixed-rate loans usually don’t come with the option to allow you to make any additional repayments.
Variable interest rates. This is an alternative you can go for which offer generally lower loan fees and interest rates. It is also known for its flexible features. However, bear in mind that since the rate isn’t fixed, it could fluctuate at any time depending on the market activity, so your repayments aren’t going to be the same amount every time.
- Check for flexible loan features
It’s a smart move to roll your debt into a single consolidated loan. However, what’s even better is if you can sign up for a debt consolidation loan that offers flexible features. Look for one that offers an option for you to get the debt paid off sooner than scheduled. Specifically, make sure to check out if the following flexible options are allowed:
Extra repayments. Whilst your finances might not be in the best shape right now, there might come a point when things start to look up. When you get to the point where you are earning enough to afford to pay more than what your repayments require, you’d want to be able to pay more to speed up your debt repayment term.
Repayment frequency flexibility. If you choose to repay your loan on a fortnightly schedule than a monthly one, you will have paid off an additional month at the end of the year. For instance, if your monthly repayment is $500, if you choose to get this paid off on a fortnightly schedule, you would have paid a total of $6500 instead of $6000 at the end of the year.
Set up automatic repayment. Make it a point to set up an arrangement that prevents you from ever forgetting to make your debt repayments. A direct deposit right from your bank account to your lender on your scheduled loan repayments is the best way to do this.
The DONTs of debt consolidation
- Get the debt rolled into a home loan
Whilst it is true that home loans tend to offer very competitive interest rates at around 5% or lower, always remember about the implications involved with merging your current debt with your existing home loan. Doing so could lead to you paying more on interest rates since home loans tend to have a much longer term.
For instance, if you have a home loan of $300,000 attached with an interest rate of 5%, rolling a $20000 debt into your existing mortgage could lead to you paying $15075 on the debt interest alone if you have a mortgage term of 25 years. However, if you choose to get your existing debts merged into a single consolidation loan with a 3-year term and an interest rate of 10%, you will only have to pay $3232 on interest rates. The only time that it will make total sense for you to roll your debt into your mortgage is when you make really high repayments as this will allow you to get the debt paid off within a very short time.
- Forget about the hidden fees
Interest rates aren’t the only aspect of a debt consolidation loan that you need to consider before making a decision. You also need to check for potentially hidden fees that may not be made aware of on signing up for the loan:
Application fees. Loan providers may hit you with upfront fees that are meant to cover the administration costs of running a credit check— something that lenders needed to do before approving a loan application to determine whether or not you are a creditworthy borrower.
Ongoing fees. Some lenders may get you charged with a monthly $10 fee. This might seem inconsequential to you at first glance but if you are to consider the entire term of the loan, that meagre $10 can add up. For instance, a 5-year debt consolidation loan can lead to an overall monthly fee cost of $600— that is definitely not a negligible amount.
Break cost fee. Whilst the Australian government has made efforts to get rid of variable exit fees in 2011, signing up for a debt consolidation loan with a fixed rate could mean that you will still get subjected to these costs. This makes it all the more important when shopping around for potential debt consolidation loans. This is especially true if you think that there may be a point where you can afford to get your fixed-rate debt consolidation loan paid off early.
- Keep using your credit cards
After you have found the right debt consolidation for your needs, it is high time you stop using plastic money. keeping up with your credit card spending whilst still working on paying off the debts you have already incurred is not really the best idea out there. Continuing to spend just like you did before is just going to push you deeper into even more debt.
Always remember that with credit cards, you’re not really using your own money but the banks. This is why after signing up with a debt consolidation loan, set up a budget and stick to it. If you can, make sure to use any additional cash you have left towards making more loan repayments so you can get the debt paid off faster.
If you have old accounts, it may be high time you close them. There’s no point in paying for all the annual credit card fees or loan service fees when you’re not really using them anymore. That money would be better off used as additional repayments to your consolidation loan.
Now that you’re aware of the don’t and the do’s when it comes to loan consolidation, make sure to get your search for the right one started by comparing all of the potential options that are out there for you.
Things to do When Struggling to Pay off Debt
To complete your application, expect to be asked for the following details:
- Personal information such as your name, birthday and address
- Reasons for taking out a loan
- Phone number
- Email address
- For Centrelink recipients, your myGov details
- Employment information
- Online banking details
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