There aren’t too many things that feel better than being in control of your life. And financial control is a serious power move that just isn’t talked about enough.
But if you’re swamped by ongoing debt payments that come at irregular times, or catch you off guard, it can be difficult to find control.
If you’ve missed multiple monthly payments or been stretched thin by unexpected bills, debt consolidation is a beacon of hope that could work for you.
What is debt consolidation?
Put simply, debt consolidation is the wrapping up of a long list of bills into one monthly payment.
Through debt consolidation, several of your debts can be combined into one personal loan, resulting in your monthly repayments being much easier to keep track of.
How does debt consolidation work?
Consider the debts you currently have. Say one of these is the remainder of a car loan for $7000, another is a credit card loan of $2000, and another is a personal loan of $4000. Each of these loans are likely to have different interest rates, repayment amounts, and due dates. These variations between your debts can make it hard to stay on top of them.
What debt consolidation aims to do is combine these debts. So, the personal car loan, credit card, and personal loan will become one personal loan, providing you with the opportunity to set one recurring payment over a set term and interest rate.
In short, debt consolidation can give you four main benefits:
- A single set of recurring payments.
- A clear timeline of when you can be debt-free.
- Greater control of your budget and cash flow.
- Could improve your credit score over time.
However, it is important to note that debt consolidation is not one size fits all and there can be a number of downfalls.
The pitfalls of debt consolidation
Debt consolidation sounds too good to be true. And I bet you’re wondering if this is actually a good financial decision?
One of the main pitfalls to consider when exploring debt consolidation is that you will likely need to extend the length of your loan to reduce your monthly payments. This means that you will inevitably end up paying more interest over the lifespan of the loan.
Other fees that can emerge are balance transfer fees, closing costs, and new loan fees.
Some more cons to consider include:
- One creditor is given all of your debt. This is concerning because if you fall behind in payments it can give them all the power when discussing a catch-up plan.
- There could be fees and/or penalties for paying out your current debt. This can include origination fees, balance transfer fees, or closing costs depending on the type of consolidation you opt for. These fees are often rolled into the new loan amount.
Before you agree to debt consolidation
It's important to know that debt consolidation does not suit all circumstances.
To determine if you will be better off streamlining your debts, or if you should keep juggling, consider the below three questions:
- Is it going to cost you more?
Your first step is to add up what you pay to maintain your current debts and compare them with the costs of the loan you are intending to consolidate with. You should also calculate the amount of interest you will likely pay for your existing loans vs a consolidated loan.
If the cost of your existing debt is higher than it would be with a new loan, debt consolidation could be a good option for you. - Have you read the small print?
Before consolidating your debts with an unsecured personal loan, or considering any loan, you must read the terms and conditions. A new loan could involve features such as an early repayment fee.
However, it could also include positive terms like no added charges for extra repayments, or payment schedule customisation. - Are you going to be able to repay on time, every time?
If you decide to apply for a debt consolidation loan, it is important not to miss payments. A way to ensure you stay on top of your monthly repayment schedule is to set up autopay so that the payment automatically comes out of your account.
Typically if you miss a payment you can receive late fees, and you also risk your credit score being lowered.
Bottom line
Multiple loans can be a headache to manage. Trying to remember what you owe, how much you owe, and when you owe it is a time consuming task that can apply a lot of pressure.
Debt consolidation acts to roll all your debts into one personal loan so you only have to worry about one set of information.
Although there are numerous benefits to debt consolidation, there are also cons you need to be aware of, as listed above.
Your first step when looking into debt consolidation is to determine if you are going to be able to repay the new loan monthly payments or if you would be better off continuing to juggle multiple loans.
If you want to find out if debt consolidation is the right path for you
JADE Finance consultants are highly trained, fully licensed financial professionals who can accurately assist you with personal debt consolidation.
We ensure the debt consolidation process is as streamlined and stress-free for you as possible, providing you with workable financial solutions to help you move to achieve your financial goals.
By providing our brokers with a few details, your circumstances will be thoroughly considered to determine the best way forward for you.
Call us on 1300 000 008 or Request a Quote.
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