If you’re feeling overwhelmed by having different debts in different places due at different times, a debt consolidation loan might be the answer – whereby it reduces the stress of multiple debts and interest rates by simplifying your finances.
Debt consolidation is bringing your existing multiple debts together into one single new loan that is subject to a single interest rate, with a single regular (usually monthly) repayment.
This makes managing your debts significantly easier and often you can end up paying less each month than you were paying before, helping you manage your repayments and enabling you to get back in control of your money.
Debt consolidation is packaging multiple debts into a single low interest loan with a single affordable monthly repayment, making your repayments easier, so you stress less.
Paying off more than one debt at a time is not uncommon. But if you’re struggling to balance your debt repayments or find yourself missing payments, debt consolidation may be worth considering. You typically do this by taking out a new personal loan to repay your other existing debts, and then paying this new loan back over a set term.
Alternatively, you may be able to use the equity in your home or investment property to repay your other high interest debts.
For example, if you have one personal loan, say for $8,000, and two different credit cards with debts of, $3,000 and $5,000, you’re likely to also have three different interest rates, multiple fees and charges and to be making three different repayments at different times each month. It’s plain to see how this can make it hard to manage your cash and to miss a payment.
One repayment to make regularly over a set term
One option you have is to consolidate your debts by taking out a new single personal loan to pay off your original personal loan plus each credit card and any outstanding interest.
With just the one personal loan you’ll have just one repayment to make regularly over a set term – in most cases you can choose the frequency of repayments (weekly, fortnightly, or monthly). This is likely to reduce the fees that you pay, and if the interest rate on the new personal loan is lower than your old personal loan and credit card rates, this can help you get ahead in reducing your overall debt.
All sorts of debts can be put together into one loan, such as credit card bills; ATO bills; car loans; personal loans; unsecured personal loans; and utility bills.
A debt consolidation loan is a good idea if:
- You are paying very high interest rates (credit cards and pay day loans, in particular, have high-interest rates).
- The bills just keep rolling in and you’re struggling to keep track of them all.
- You are struggling to keep up or make all your repayments and bills.
But be aware, a debt consolidation loan doesn’t mean you’re on easy street – you still have to pay off the money you borrowed. What it does mean though, is that you can take a breath and take back some control. You should have a stable source of income as you’ll need to commit to making the repayments each month. You should have created a realistic budget and know how much you can afford to pay each month. Most importantly, you should be confident you are able to avoid getting into the same debt situation again.
Why should you consider debt consolidation?
At the end of the day it’s a matter of preference, but many choose to put all their debt into one loan for a variety of reasons, including:
1. One loan for all – By far the number one reason people consider debt consolidation is because it’s all been put together into one bill reducing the number of things to think about.
2. A simplified repayment plan – No more forgetting payment dates – consolidating your debt means you will remember one date (usually monthly) to pay it all off, which can aid in managing your budget and cash flow successfully.
3. An end in sight – Paying off debt can feel like it’s never ending, but the truth is there will be a light at the end of the tunnel, especially when you go for a debt consolidation loan. All debts into one loan means they will all be paid off at the same time.
4. Potentially lower interest rate overall – Imagine having different interest rates for various debts. Let’s say, for Debt A there’s an interest rate of 3%; Debt B has 2.25%; and Debt C has an interest rate of 3.33%. With debt consolidation, the new interest rate might be set at just 2.75% for all 3. In the long run, you will be paying less interest and will be saving money from it in the process.
What are the advantages of debt consolidation?
- Budgeting made easier – because there’s only one loan, setting up a repayment plan is easy – you’ll have a single fixed time frame of when you’ll be debt free allowing you to budget more easily and start saving.
- One set of fees and charges – often loans come with annual administration fees and charges. Having just the one loan means you can reduce the overall amount of administration fees and charges you need to pay.
- Reduce the overall amount of what you owe – if your new consolidated loan has a lower interest rate than your other loans and you have only one annual fee, this will reduce the overall amount that you owe.
- No more missed payments – unlike before when you had several bills to pay with different due dates, now all you have is one payment each month, making it far easier to manage and much harder to forget.
- Fix Bad Credit – Unless your new debt is very large, debt consolidation won’t affect your credit score. In fact, as you continue to make your repayments on time and in full, demonstrating good repayment habits and avoiding defaults through late payments, your credit score should improve.
- No more annoying calls from creditors – lenders enlist the help of debt collectors to help collect payments from people who haven’t been paying up or who have a history of paying late. When you consolidate your debts, these calls should stop entirely.
What are the disadvantages of debt consolidation?
If you don’t change your financial behaviour and continue to use credit cards or pay day loans and get into more debt, you could land up in a worse position than you started with. Debt consolidation will only work if you are willing to change the spending behaviour that got you into the situation in the first place and learn to manage your finances better.
- Exit fees – some banks or lenders might have exit fees if you decide to withdraw your loan from them. Ask first and see how much it will cost. Withdrawing it might be expensive. This will need to be factored in.
- Taxes – taxes and other fees may apply if you decide to use your home loan (for example) to consolidate other debts.
Is debt consolidation for you?
While it may sound like an easy and quick way to pay off debts, there are a number of things you have to think about first before you want to consolidate your loans:
1. Is this what is financially best for me now? – Can you afford to pay off a single loan through a regular single payment versus paying off small ones with different interest rates?
2. Am I saving money in the long run? – You should be able to save more money by paying off a single debt with lower interest rates.
3. Do I have a good credit score? – The better your credit the more likely you will be to offered lower interest rates. There are debt consolidation options for those with a poor credit score, but you may need to pay a higher interest rate or more fees.
4. Are there any fees or charges? – Sometimes there are exit fees you have no idea about, or because of your bad credit history, you may be paying additional fees and charges. Be wary about such so you won’t be paying more than you bargained for.
5. Don’t ignore the fine print. – Don’t be afraid to ask questions. If a part of the agreement or contract is unclear to you, make sure to clarify anything first before signing on the dotted line.
Need help with debt consolidation?
For more information on whether debt consolidation might be an option for you, call one of Fix Bad Credit’s debt experts on 1300 406 172. Our debt experts can help you assess your financial situation for free and identify debt solution options tailored to your specific personal financial circumstances. Using their in-depth knowledge of credit law and debt processes, our team at Fix Bad Credit can advise whether debt consolidation is right for you.
Debt is one of the few stressors in life that doesn’t go away. The worry is always there, along with the feeling that there is nothing that can be done about it. Money and debt worries cause heavy emotional and mental burdens, which can affect your health, your work, and your relationships. But just know you’re not alone. If you’re feeling overwhelmed by money matters, we’re here to help you find relief from your debt stress. Talking about debt can be daunting. It’s hard to know where to start or what your options are.
However, you can take a small step right now by picking up the phone.