Debt consolidation can be an attractive option when you have mounting debts that you’re struggling to keep on top of.
But what are the costs that come with debt consolidation? And will you be better off with debt consolidation?
While there are a few debt consolidation options, a debt consolidation loan is one larger loan used to pay off a number of smaller debts. You then have just one monthly payment to make.
Debt consolidation can save you money, as long as you’ve done your research and compared consolidation loan options.
Ideally, your consolidation loan should have a lower interest rate than your previous loans.
If your debt is across multiple credit cards for example, you may have a number of interest rates to compare. In this case, you should figure out the average interest rate and aim to find a consolidation loan with a better interest rate than that average.
When you consolidate your debts to a single loan, you no longer need to service the fee schedules of multiple creditors.
If you are currently struggling to make repayments on your various debts, you could be charged a fee by each lender, on each default. This can quickly add up.
So we know that by streamlining your debts into one loan, you can save money. But what are the fees you’re looking at if you go ahead with a consolidation loan?
Here are some examples of the various fees that may be included in the terms and conditions of your loan, so again it pays to compare lenders and their loans before applying.
Origination fee: Most new loans, not just debt consolidation loans, incur an origination fee of between 1-5% of the total loan amount. Lenders explain that they are to cover the administrative costs of setting up your loan. Another term for this is a closing fee.
Annual fee: This ongoing fee is often around $50 per annum, though it can be less.
Late fee: Late fees apply to missed repayments. Depending on the type of debt consolidation you choose, this can vary quite a lot. Regardless, you should avoid missing repayments as much as possible.
Early cancellation fee: Some lenders charge you for repaying your loan earlier than is outlined in your loan plan. It may be a flat fee (up to around $500) or a percentage (around 1% of the total loan amount). Lenders charge this fee as they would prefer to earn more interest from you rather than having you close the account sooner than planned.
Interest charges: The interest charges depend on the terms of your loan, and can vary broadly depending on the type of lender you borrow from, the type of loan you take out, and your credit rating. Mortgage refinancing may only incur a 4-10% interest rate, whereas a debt consolidation loan could be anywhere between 7-30%.
Negotiating a good interest rate, and finding a lender with reasonable fees are two ways to ensure debt consolidation costs you the least amount possible.
Ensuring you meet every repayment on time will save you from extra charges and will continue to improve your credit rating.