Many of us have multiple debts to repay, and you may have come across the idea of loan consolidation.
If you’re not quite sure what loan consolidation is, read on to discover all about consolidation loans and how they might be useful for managing your debts.
So what is loan consolidation?
Loan consolidation is when you combine several smaller debts under a single, larger debt.
Doing this can make managing repayments more straightforward, and if the right consolidation loan is chosen, can lower your interest rate, total monthly repayment amount, or both.
There are a few ways to consolidate your current loans into a single repayment:
- Secured personal loan: This option requires you to put up a large asset, such as your home, as collateral. The loan will be used to repay your various debts, and you will then be responsible for repaying the provider of the new loan.
- Unsecured personal loan: This loan works the same way as the secured loan, however as the name implies, you aren’t securing your loan with collateral. This means that you may not have as favourable loan terms, including the interest rate.
- Refinancing your mortgage: If you already have a mortgage, you may want to roll your current debts into the mortgage. Most lenders will increase your loan up to 80% of the value of your property, or 90% if you have mortgage insurance.
- Credit card balance transfer: if all of your debt is card based, transferring your credit card debts to a new card may be the best consolidation option. Many lenders offer an introductory interest free period for balance transfers.
What types of loans can be consolidated?
You can consolidate most types of debt into a single loan. This includes credit card balances, existing personal loans, home loans, car loans and potentially even debts handed to a debt collection agency.
Benefits of loan consolidation
Moving multiple debts into a single consolidation loan can offer a number of benefits.
Not only is it easier than juggling a number of repayments each month, you only have to deal with one lender. With only a single interest rate and single set of loan fees to consider, you are in a better position to budget accurately.
Beyond convenience, the biggest benefit of loan consolidation is the potential financial savings. By moving your debts to a single loan with a lower-on-average interest rate, you can cut a significant amount from your total interest paid over the life of your debt.
Tips for successful loan consolidation
Once you have been approved for a consolidation loan, it is important to ensure you make your repayments on time, every time to avoid potential fees and defaults which can harm your credit rating.
If you choose a credit card balance transfer, discipline is paramount! Your previous balances will be cleared, which means you will have credit available, which can be tempting to use.
But remember that this will only deepen your debt and renew the debt cycle. Consider closing your previous credit cards to avoid this trap.
Creating a reasonable budget that allows you to maintain an enjoyable lifestyle while getting out of debt will set you up for financial success.
Seek financial advice and begin your debt relief journey now.