The term debt consolidation is one we hear fairly often, offering to simplify out-of-control debts and get individuals back on financial track. Also, debt consolidation can certainly be beneficial to many.
But, the ins and outs of the process can leave you wondering what it is you’re getting yourself into.
So here, we’ve collated all of the pros and cons you need to know about debt consolidation.
With debt consolidation, you take out a single, larger loan to pay off all of your smaller debts.
The goal of debt consolidation is to make managing your debt repayments simpler and to save you money through lower interest rates, and reduced fees and other charges that come from reducing multiple credit accounts to one.
By only having one periodic repayment to make, it is much easier to budget and schedule your repayments so that they are paid consistently on time.
Lower monthly repayment
If you’ve been struggling to keep up with your multiple repayments each month, you may be wondering how combining those debts will make your repayments more affordable.
Well, when you have a consolidation loan, your repayments are negotiated and set over a term, which is usually five years. And each month, your repayment amount will stay the same.
Credit cards have notoriously high-interest rates, as do many store cards. Personal loans, however, generally offer low-interest rates.
When choosing a consolidation loan, aim for an interest rate that is lower than the average of your current debts’ interest rates.
If all of your current debts are on credit cards, consolidating your balances onto a new credit card (called a balance transfer) may be the debt consolidation option for you.
Many banks offer introductory rates. It’s a great incentive to pay your debt off promptly, during the introductory period.
Your spending habits
It’s important to acknowledge why you got into debt in the first place.
Debt consolidation can help you repay your current debt, but it won’t prevent you from taking on more debt.
Try to not take on any more loans, to prevent the debt spiral from beginning again.
Secured loans can affect your home
The majority of debt consolidation loans are secured, that is, they require an asset such as property to be collateral for the loan.
This means that if you fail to repay your loan, the creditor can legally sell your home to recoup some of their losses.
While having a set interest rate, repayment amount and term loan is often seen as a positive, for some, this inflexibility can be a con.
For example, you may not be able to redraw on your loan, or pay your loan off early without paying a fee.
Loans all come with a set of fees. These include application, establishment and late payment fees.
While the application and establishment fees are unavoidable and expected, it pays to be wary of accruing late payment fees, as this could potentially set you back hundreds of dollars.
Educating yourself on the pros and cons of debt consolidation loans will help you make the best decision for your financial situation.
If you have any questions after reading this article, speak to one of the experts for free advice on whether debt consolidation may be a good debt solution for you.