A debt consolidation loan is an attractive option for many people who are struggling to repay their debts.

Under this structure, you’ll take out one large loan so that you can use the funds to repay your existing debts.

This strategy is particularly effective for eliminating credit card debt, as debt consolidation loans typically have lower interest rates than credit cards do. This can save you a lot of money over the life of the loan.

As beneficial as debt consolidation loans can be, there are a number of pitfalls that could land you in even worse financial trouble if you aren’t careful.

Here’s how to know when to take out a debt consolidation loan.

You Have a Plan to Repay Your Debts 

You wouldn’t go out for a hike without having a plan for getting back home, and taking out a debt consolidation loan is no different.

You need to have a plan for repaying your new debt. Otherwise, you’re just moving the debt around without making any progress.

Before applying for a debt consolidation loan, think about the approach you’ll take to get out of debt. To do this, start by evaluating your monthly budget.

Add up any expenses not related to repaying your debts and subtract that amount from your monthly income. This is the amount you can afford to repay each month.

When applying for loans, it is a good idea to leave yourself a bit of a cushion to accommodate any unexpected expenses.

The last thing you want to do is wind up having to use the credit cards that you just repaid. Choose an amount that you can reasonably afford to pay each month so that you don’t end up racking up even more debt.

You Have a Moderate Amount of Debt 

A debt consolidation loan doesn’t get rid of your debt, but rather, moves it to a new creditor. This means that you’ll still have to repay the same amount going forward.

If your total debt amount is more than you can afford to repay, even after restructuring, a debt consolidation loan won’t help you.

This option is best for those who only have a moderate amount of debt.

Restructuring your debt into a single loan streamlines your monthly repayments so that you only have to pay a single creditor, rather than several.

This can make it easier to stay on top of your repayments and avoid going late.

You Keep Your Spending to a Reasonable Level 

Perhaps you made some financial mistakes when you were younger or had to weather a financial emergency, forcing you to take on large amounts of credit card debt.

This is perfectly understandable, and a debt consolidation loan can help you get back on your feet. However, it is crucial that you have your spending in check so that you don’t have to resort to using your credit cards again.

If, on the other hand, you have gotten yourself into debt because you simply can’t resist the latest sale at your favourite store, a debt consolidation loan could set you up for financial disaster.

Once your credit cards are paid off, it can be incredibly challenging to resist the temptation to start using them once again.

Before getting a debt consolidation loan, you’ll need to address the larger issue that got you in trouble in the first place: spending beyond your means.

Your Credit Rating Is Decent 

In order to take out a large loan to cover your existing debts, you’ll need to convince a lender that you are a safe bet. The best way to do this is to have a strong credit score before you apply for a debt consolidation loan.

Of course, that is easier said than done, especially when you are in debt.

If you have a bad credit score, you’ll find it much more difficult to obtain a loan, as lenders are reluctant to offer credit to those who don’t manage it well.

It is possible, though, but your interest rates are likely to be much higher. This can negate any interest savings you might have been able to achieve with a low-interest loan.

Learn More About Debt Consolidation Loans in Australia 

Here at Debt Negotiators, we are proud to provide free advice for Australians.

We welcome you to get in touch with us to enquire about debt consolidation and whether or not it is right for you.

We can advise you as to when to take out a debt consolidation loan to help manage your debts. Call today to learn more!