When you have debts with multiple creditors, keeping up with the payments can be a challenge.
Debt consolidation is a loan you take out to repay all creditors and then make one monthly payment to the bank that issued it.
Your new loan payment is typically lower than the sum of your previous debt repayment minimums because of a lower interest rate. This option can be a good one for people who are deeply in debt and trying to avoid filing for bankruptcy.
Be sure to check with your current creditors to see if you would be assessed a penalty for paying off your loan early.
If so, weigh those fees against the fees to take out a consolidation loan and determine the potential savings you could realise by doing so. Paying attention to the length of your new loan is also important. While you could save money by paying less per month now, you may end up paying more in interest if the new loan extends longer than your current loans.
A debt consolidation loan can be a fresh start if you’re disciplined about your financial habits going forward. If you think having access to a home equity line of credit would tempt you to rack up more debt, it’s best to pass on that feature and just borrow enough to pay off other creditors.
You could end up in an even worse financial position if you continue to use credit without the ability to pay off what you borrow each month.
One last thing to keep in mind is that the lender has the legal right to foreclose on your home if you default on the debt consolidation loan. Since this isn’t the case with credit cards, make sure you have the means to keep up with your new loan before applying for it.
Once you pay off your other creditors, you no longer have to worry about constant phone calls demanding payment.
Creditors often don’t want Australian consumers to know about the debt consolidation option because it means they lose out on high interest payments and late fees.
Debt consolidation may make sense for you if you can no longer manage your debt, are unable to negotiate better payment terms, and you can get better terms with a new lender.