There are many reasons you may be considering a debt consolidation loan. While a consolidation loan can be an effective way to get out of debt, it’s not the right debt relief solution for everyone.

So when is it a good idea to consolidate your debts?

Debt consolidation loans

Debt consolidation loans are a popular way to repay debt because they allow individuals to combine their multiple debts – credit cards, store cards, personal loans and others – into one periodic repayment, with a set loan term of usually five years.

If you’re nodding along to the following points, a debt consolidation loan might be a good idea for you.

You’re struggling to keep track of lots of different debts

It can happen without warning; the credit cards add up and the bills keep coming in.

The beauty of a consolidation loan is that you don’t have to worry about multiple due dates and interest rates. Your new loan pays off your previous debts, and you only have one monthly repayment to manage.

Your interest rates are higher than they need to be

Especially if you have credit card debt, you could be paying unnecessarily high interest.

Make a list of each of your debts, the amount you owe, the interest rate and the monthly repayments you make. You may need help from a financial counsellor, but you can determine how long it should take you to pay off your current debts.

Next, calculate the average interest rate from your debts. One of the main goals of a consolidation loan is to pay less interest.

Compare this average to a range of debt consolidation loans to see if this is a good reason for you to get a consolidation loans.

You can’t keep up with your current repayments

Have you accumulated debt beyond what you can afford to repay each month?

It is worth contacting your lenders to negotiate payment plans, but if you are still unable to meet your minimum repayments, getting a consolidation loan can allow you to repay your debt over a longer term, easing the repayment burden.

You have a stable source of income

A consolidation loan is a formal financial arrangement, and you need to be able to commit to the repayments for the life of the term.

This means that you need to be able to show the lender that you have the means to continue repaying the term to completion, and a stable source of income (permanent employment longevity) is the best way to prove this.

You have a repayment plan in place

This needs to be in place before you take out a loan, not after. Writing an accurate and realistic budget will show you what you can afford to pay towards your debt each month.

You then need to ensure that you don’t commit to a consolidation loan that requires a higher repayment than your budget allows. Once you have this plan in place, you are ready to research consolidation loans.

You’re disciplined enough not to get into more debt

Debt consolidation can only help you repay the debt you currently have.

You need to be able to recognise the spending behaviour that helped amass the debt in the first place, so as to be able to avoid going down debt cycle again. For example, if you aren’t able to avoid the temptation of having a clear credit card, make sure you close the account after you have repaid the balance owing.

Or, if you fell into debt due to not having an emergency fund, you need to budget in an amount to put towards saving each month.

If you think a debt consolidation loan may be helpful for your situation, it’s a good idea to seek free financial advice on the types of debt consolidation loans available.