Debt Consolidation Loan: Everything You Need to Know
A debt consolidation loan refers to a specific type of personal loan that enables you to roll different debts like store cards, credit card balances, and other personal loans, all into one place. That way you can repay them at one.
The perks of Debt Consolidation Loan is that the consumer will have to think of only one due date. They will also enjoy the benefits of lower interest rates when compared to other products. This also means that the annual fees are combined into one or if lucky, no annual fee at all.
Is it good to get a debt consolidation loan?
It depends on your situation or how you handle finances, but there are some circumstances where debt consolidation loans are good to try. It could save you much money, time and hassle. Let’s try to give an example:
If you are having trouble paying on time and paying every now and then for separate bills, you are more likely to skip and wind up for missed payments. With debt consolidation loans, all of the payables are compiled. This means you will have one due date to watch out for.
Loan Rates, Interest, & Fees – Numerous debts with higher interest rates
Usually, credit cards are associated with higher rates when compared to charges that come from debt consolidation loans. Therefore, having a large credit card balance is more expensive than having it on a debt consolidation loan.
If you have no idea on which debt to put first. You will find it difficult in trying to manage numerous debts at once. Do you prioritize paying your personal loan or credit card first? or you are paying them at the same time?
A debt consolidation loan can make it easier for you, especially if the advantages of consolidating outweigh its downsides. If you choose a debt consolidation loan, it will give you a longer loan term for about 3 to 5 years. By this strategy to stretch your debt out, you might end up paying more interest than you would compare to paying the original debts in a short matter of time. It is always best to contemplate on both options so you can be sure that debt consolidation loans are really worth it.
Will a debt consolidation loan affect your credit record? Like some other sort of lending, a debt consolidation loan can possibly affect your credit record if you cannot handle your responsibility in meeting repayments. However, if you think you can keep up the responsibility, it will not downgrade your credit score.
If you opted to go for a debt consolidation loan, it will reflect as an inquiry on your credit history and if you are lucky, as a different source of credit that you can readily avail. This can be good as it can lower credit utilization. But it could also increase the total amount of credit available. And this could be bad at some point.
Nonetheless, paying off all the lingering debts and closing dormant credit accounts can be good. It is a good move both for your credit records and your financial situation in general.
Personal Loan & Rate – Why is debt consolidation loan worth considering
If you have debts that accumulated from car loans, credit cards & bad credit loans, this strategy can be so much helpful since you are able to roll over different debts into one simple and manageable personal loan.
Aside from the advantage of not having to pay multiple payments since you have compiled them into one monthly payment, there is also a high likelihood to get lower interest rates. This is a long-term and great savings opportunity for those who have loans with high interest rates.
Let’s say you have this debt:
- $20,000 for car loan with an interest rate of 9%
- $2,000 on your stored card with an interest rate of 18%
- $5,000 balance in your credit card balance with an interest rate of 22%
The payables above would be $899 monthly while for the interest, it would cost $5,373 in a period of three years. If you are able to roll that $27,000 total of debt into one loan and the interest rate is 8%, then the monthly repayments will just be $846. and The resulting total interest in a span of three years will be $3,459. That will give you $1,914 of total savings from interest.
In Debt? – Must Do’s in Debt Consolidation Loans
Yes, lowering the rate loan can definitely help you kickstart your savings from paying debts. Meanwhile, it is important to strongly familiarize yourself on how to use the product to get an advantage. If you don’t know how to avoid the traps, you may end up paying your debts longer than you have expected it to be.
Absolute Must Do’s
Decide what sort of debt consolidation loan you need
There are numerous options for a debt consolidation loan but you may end up paying more if you pick the wrong choice. That’s why we recommend taking the time to explore the different options and find the best loan for yourself. For starters, you must decide first which type of loan you prefer to sign up for: secured or unsecured.
As you can expect with this type of personal loan, you will be required to put up your house or car as an asset. This serves as security or assurance for the loan. Now, since you are considered to be less risky, your lender is more likely to give you lower fees and interest rates. Just keep in mind that if you turn out to be irresponsible in making repayments, your lender can take a legal action to repossess such assets. This serves as restitution for the losses it incurred.
In Australia, some debts loans are not secured. It means that there is no security needed. This is preferable if you are a consumer who does not have assets or if you are not willing to risk your home or your car. Thus, you are more likely to pay much higher fees and interest rates as compared to secured loans.
You will be having options to choose between variable and fixed interest rate. Here are the differences between the two.
With the fixed interest rate, your interest will be permanent for the locked-in period. You can make a clear overview of your budget since you already have an idea with your current repayments. Now, if you start comparing your debt consolidation, we recommend you to avoid getting a loan with a high break cost fee in case you prefer a loan to be paid early. Lastly, bear in mind that fixed-rate low interest loans are not flexible for you to make amendments.
On the other hand, a variable rate is an alternative option if you prefer loans with flexible terms. Generally, it has lower fees and interest rates but the rates could change at any given time due to the instability of the market.
Check for flexibility features
If you decide to roll your debt over to a consolidation loan, you are already making a smart move. But you maximize this when you choose a loan with the specification that will allow you to pay off these debts sooner. You can do so by doing the following flexible options:
Your finances may not be in the best figure right now, but who knows you might get a promotion or year-end bonus at any moment. So at the moment, you have extra cash on hand along the way, you may want to ensure that the debt consolidation loan you signed up for, will enable you to fully pay your existing loan.
Flexible repayment frequency
When you choose to repay your loan on a bi-monthly schedule instead of once a month, you will end up paying for an extra month at the end of each year. Let us set an example. You are ought to repay $500 in a month. In one year, you will need to pay off $6,000 for your loan. On the other hand, if you opt to choose the 26 bi-month option, you need to pay off $6,500. This gives you a higher chance to finish your loans sooner.
Setting up automatic repayments
On top of it, you can also make sure that you will never miss a chance of paying your monthly or fortnightly schedule by enabling deposit directly from your bank account to the lender.
The DON’Ts for Consolidating Debt Loans
Rolling your debt into home loan
Yes. In fact, interest rates for home loans are highly competitive as of the moment, with some of the factors that are under the 5% mark. But be cautious when you are incorporating different debts to your home loan as you might end up paying more interest for the fact that home loans have a much longer duration.
Let’s make an example. Let’s say you have a home loan amounting to $300,000 with an interest rate of 5%. By rolling an amount of $20,000 into your mortgage, you will be paying $15,075 of interest on this debt over the next 25 years. But if you merge it into a consolidation loan, you can pay it for three years with an interest rate of 10%. The resulting amount to pay for interest is only $3,232. Hence, rolling all your debts into a home loan will have a positive financial effect, only if you keep the repayments high. This way, you can pay it off in the quickest time possible.
Don’t forget to check for hidden fees
When comparing debt consolidation loans, the interest rates are not the only factor that you should consider. You need to ensure that you can also cover any additional fees such as:
- Application fees: On top of administration fees, the provider may also charge you with upfront fees. This is to cover their measures in running a credit check before approving you for this type of loan.
- Ongoing fees: In some instances, you may also be charged a small monthly fee for about $10. You might think that it is just less than a tuna sandwich nowadays. But, if you add it all up for more than 5 years, your $10 will reach $600. Just think of how many tuna sandwiches you could possibly buy with that.
- Break cost fees: Back in 2011, the Government of Australia might have kicked variable rate exit fees to the curb. But if you choose to sign up for fixed-rate consolidation loans, you might still feel the effects of break cost fees. So when you start to compare your debt consolidation loan, this is something you need to consider especially when you are planning to repay your fixed-rate loan earlier.
Check Your Credit – Keep using your credit cards
Once you have selected your preferred debt consolidation loan, it is highly recommended for you to avoid overspending like you used to do. This is because it may bring negative impacts to your finances, particularly adding more debts to pay.
To put it simply, the money being used comes from the bank, not yours. So once you are all set up with a debt consolidation loan, try to stick to your budget as much as possible. It is also recommended to set aside extra cash in case of extra repayments in the future.
It will be good to close some of your old accounts as it may just incur loan service fees or annual fees. After all, you won’t be using these accounts anymore. So it’s better to put the money in use by directly paying off the debt consolidation loan.
Now that you already know all the dos and don’ts when it comes to debt consolidation, you can now kick off your way to comparing debt consolidation loans.
What you should do in case you struggle with debts
There are certain helpful resources that you can use in case you are finding it hard to pay off all your debts on time. You may consult debt advisors or simply browse the internet. Here are the three groups that you can turn into for help:
- Your credit provider itself. If things get messy with finances, you should get in touch with your loan or credit card provider or lender. The earlier you consult them, the better. They have so-called hardship assistance, which may put you on a payment plan or make some adjustments on your repayment terms so it would be easier to be on track. Now, as you contact the lender or loan provider, ask the representative if you could speak to their hardship department. Then, you must explain as to why you are having such trouble and how long do you think it could last. With regards to that, you can make a request to change the terms of loan repayments. Should they refuse, you can raise what is stipulated in the National Consumer Credit Code, section 72.
- Community Legal Centres. Of course, no lender or borrower would ever want to reach this point when the lender is already insinuating legal actions due to missed payments. But when it happens, you might need legal help. Free resources like the local Community Legal Centre can help you settle things down with all fairness.
- National Debt Helpline. This is a non-profit organisation that provides free and independent financial counselling for borrowers who want to get back on track. Especially when you are already struggling with finances, this free service is quite a big help towards fixing debt problems.
- Lifeline. Some problems become worse when unfixed overtime. When the mind is compromised, it can take a toll on someone. If you think you cannot surpass this tough time, reach out to Lifeline online or over the phone and allow them to talk you through it.
Being stuck with debts is no fun. As everyone can experience this, you shouldn’t feel embarrassed to ask for assistance. After all, taking steps to improve your financial situation is much more worthwhile than doing nothing else.
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