Your InfoChoice guide to debt consolidation loans
Many people who have several debts, even if they’re servicing them well, choose to take out a debt consolidation loan simply to streamline their finances. Having all your credit agreements all under one umbrella is a good way of managing debt as you only have the one payment each month to think about and remember.
Debt consolidation is also a strategy for saving money on repayments and interest, if you can lower your overall interest bill by finding a low-rate debt consolidation loan.
How to use a personal loan to consolidate debts
When you decide to consolidate your debts, you take out one personal loan to pay them all off, then start repaying the new loan instead. More often than not, your new interest rate is lower than those of most of the other debts, so your payments are more affordable. This means you can pay off your debts faster, or at least more comfortably.
You do often need to factor in the cost of refinancing, or early repayment fees with most of your older debts, though. These fees have to be added to your new loan balance if you can’t close them out with liquid cash. Use a personal loan calculator to help you work out your repayments.
How does debt consolidation work?
You can consolidate several types of debt with a consolidation loan. When you are approved for a debt consolidation personal loan, you must prove to the lender that you have used the funds that are deposited in your account to repay your debts.
The lender may pay the debts themselves, based on the information or the bills you give them.
Benefits of debt consolidation loans
You have just one payment a month instead of several, disparate ones.
You will probably reduce your overall monthly spend on the debt.
You’ll have paid off old, lingering and troublesome debts, so there’ll be no more calls from debt collectors.
Disadvantages of consolidation loans
You might end up in more debt if you fall behind on payments or add to the original or later debts.
You’ll need to pay the early close–out fees on your old balances.
Which debts can I consolidate?
These loans are commonly consolidated. If you have two or more loans you can consolidate them under one “roof” or even just refinance one loan to a lower interest rates or annual fees.
If you’re dealing with debt in the form of credit card balances then you can take out a personal loan to pay it off. You’ll find the interest rate much more attractive and if you can’t get a balance transfer, a consolidation loan is a good option.
Store or charge cards
These cards also have high interest rates and so if you’re finding it tough to control them, consolidation is usually a good move.
Other credit agreements or accounts
Personal loans for debt consolidation can also take in debts like private loans, utility debts and overdrafts. Check with the loan provider whileyou’re comparing.
Can I get a debt consolidation loan with bad credit?
Yes, it is possible to find personal loans for bad credit.
If the repayments on your debts are becoming problematic and you can’t manage them comfortably, a consolidation loan is actually a sensible step. You might have a higher interest rate than you would do if you had good to excellent credit, but as long as it’s at least slightly lower than you’re already paying, it can help you.
Key issues with debt consolidation loans
The early repayment fees
Many loan and credit card agreements ask you to pay penalties for early repayments. Find out how much these will add up to (it’s also always worth asking for a waiver or a reduction) and add them to the new loan’s balance.
The lender’s legitimacy
Debt consolidation loan hacks
Budget hard to make sure you pay every month.
Make any extra repayments you can afford to drive the debt down quicker.
Look for money saving tips and tricks to reduce your monthly spending.
Take your time when you compare loans so that you get the most appropriate one.
Can I apply for debt consolidation even though I’m on Centrelink?
Centrelink is classed as genuine income by some lenders and so it can be used to assess your ability to service a consolidation loan. It’s doubly important to work out your repayments if you’re a beneficiary as you’re on a low and possibly fixed income. You also need to make sure that the lenders you’re looking at accept Centrelink.
You can compare personal loans for debt consolidation purposes at InfoChoice.
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