It can be all too easy to get bogged down under piles of debt in the modern world. Debt that made perfect sense to take on when viewed in isolation can suddenly seem overwhelming when the payments for credit cards, loans, hire purchases and store cards all start arriving at once. If you’ve been struggling to keep on top of things, a debt consolidation loan could be just the ticket to bring some order back to your finances. But you need to do your homework first - follow our five pointers on debt consolidation to check if it could be right for you.
1. What is a debt consolidation loan?
Debt consolidation is quite simply the process of bringing multiple sources of debt into a single, easier to manage loan. It means one repayment each month or fortnight instead of many and you can often save a bit of money if the interest rate on the new loan is less than that of all the other debts combined. Usually the monthly repayments on a single, larger loan will be less than many smaller loans.
Tip. Do your maths and be realistic about what a debt consolidation loan can do for you. Life will be easier with a single repayment each month, but make sure you can afford the new repayment amount.
2. Is there anything special about a debt consolidation loan?
Not usually. A debt consolidation loan is simply a new loan large enough to cover all your smaller debts. You take that freshly borrowed money, pay off all your small debts and begin paying the new one. Like any loan, approval isn’t guaranteed so you’ll need to talk to someone at the bank and find out what’s possible.
Tip. Discipline is key to making a debt consolidation loan work for you. If you’ve taken out a debt consolidation loan, it’s important to not take out any other loans or credit cards as you’ll soon be over-committed and back to square one.
3. What types of debt consolidation are there?
Virtually all debt consolidation loans will be a personal loan. There’ll be an application and approval process before you can begin the process of paying off the other debts. Another type of debt consolidation is a credit card balance transfer. A balance transfer involves transferring debt to a new credit card instead of a personal loan. The difference between the two is that a personal loan has fixed payments and a payoff date, whereas credit card repayments are based on the balance and may bring temptation to use the card for new purchases.
Tip. Use an online calculator to help you see exactly how a debt consolidation loan can help you get out of debt.
4. Watch out for unexpected fees
When applying for a debt consolidation loan, be sure to check what fees are involved. Most loans attract some kind of loan processing fee and there may be others. Ensure there are no nasty surprises down the line by asking for a full breakdown of all costs involved.
Tip. Choose your terms wisely. It may be tempting to choose the longest term available for your new loan, however, if you think you can afford to pay a bit more each month over a shorter term, you’ll save more in interest in the long run.
5. Find out if early repayment costs will affect you
Before you take out a debt consolidation loan, it’s important to check with all your existing lenders exactly what costs may be involved in paying them off. Some loans and hire purchases will charge extra for early repayment, these costs are often calculated based on the amount of money still owing and the amount of time left in the term. Call all your lenders and ask them to calculate the exact amount you’ll be required to pay to clear the debt - it’ll almost always be different to the outstanding balance you see on your statement.