Is it time to consolidate your debt?

At any given moment or, following any choice, something can happen that drastically impacts your financial stability.

This can be something like, overestimating our affordability and taking on more debt than we can handle or losing our monthly income, even for a short time. Perhaps we didn't account for piled-up interest on debts. It becomes easy to see how quickly one can descend into a sea of debt.

Furthermore we may not know how to get out of this situation and gain control of our finances again. This is when it's a good idea to ask for help or get advice from a professional.

What are the benefits of debt consolidation?

Often times we hear people tell those struggling or drowning in debt, to consolidate their debt. But what does this mean?

To save some time allow us to explain - debt consolidation refers to a method of refinancing debt by taking out a personal loan at a lower interest rate, with the intention of using the money to pay off our existing debt.

This debt usually comes in the form of short-term, unsecured debt such as credit cards, store accounts and payday loans.

There are many benefits to taking out a debt consolidation loan, which we will discuss below.

Simple to obtain

A debt consolidation loan is, in essence, a personal loan that you take out to pay off your existing debts. The process is quick and easy and you can apply online for your loan. No long lines at the bank and no mountain of paperwork to fill in.

The only important thing to remember is that in order for you to secure a low interest rate that will enable debt consolidation to save you money, you must have a fair or good credit score. 

If you've already been handed over for debt collection, chances are you non-payment has been reported to the major credit agencies in the country and you will have to pay higher interest to secure a loan. 

Fewer accounts to keep track of

Once you take out a debt consolidation loan you only need to keep track of and manage one single repayment a month as opposed to many. This makes debt management a lot easier and will allow you budget with ease. 

Lower interest rate

The interest rate on your debt consolidation loan is very likely to be much lower than the interest rate on your credit card or store accounts.

This means that you pay much less in interest fees, which ultimately will save you money.

If however you get a lower interest rate but opt for a longer loan term, it is very likely that you will end up paying more in interest. This is why when it comes to consolidating debt balance is key. 

Quicker repayment period depending on repayment ability

With lowered interest rates that save you money, you are able to repay the loan amount faster than you would have if you were still paying off individual accounts.

Additionally, this allows you to reach your debt freedom goals much soon. Unfortunately most people that consolidate debt opt for a longer loan term to help them lower their monthly repayments and free up cash for everyday living expenses.

Gain control and prevent debt from becoming unmanageable

When you have multiple accounts and bills to keep track of, things can become overwhelming and you can quickly lose control of your finances. By consolidating your debt you are able to regain control of your budget and finances and your debt repayments become manageable again.

Boosting your credit score

With only one monthly repayment to take care of, you are much less likely to miss any payments. By making your payments on time every month you are improving your credit rating - which is always a bonus.

How to apply for your debt consolidation loan

As mentioned, applying for a debt consolidation loan is fairly simple and can be done at any time online. You would simply need to decide on which finance provider you want to approach, we recommend you use a loan comparison site to view loan options side by side.

Once you have made your decision on which finance provider to approach you need only fill out an online application form and the respective finance provider will be in touch about the success of your application.

After you have been approved for your loan and the funds have been transferred to your account, you will use the money to pay off your existing debts.

As grand and amazing as debt consolidation sounds for resolving your financial issues, it is not a cure-all and is not always your best option.

When debt consolidation is not a good idea

You have bad spending habits

A debt consolidation loan cannot fix poor spending habits. What we mean by this, is that there is little to no point of taking out a loan to consolidate your debt if you are simply going to pay off your credit card and store account today and max them out again tomorrow.

You can be debt-free in 6 months

If you are able to pay off your existing debts without any added financial assistance within 6 months, it would not be worth it for you to obtain a debt consolidation loan. Debt consolidation loans would normally take longer than 6 months to repay and it is ill-advised to take on more debts if it’s not necessary.

Your total debt exceeds 50% of your income

Generally, the rule is that debt consolidation is an appropriate choice when your debts accumulate for 40% or less of your gross income (this excludes a home loan expense).

If your debts exceed 40% of your gross income debt consolidation is not going to work out and you may want to consider debt counselling or debt relief instead.

You may incur early settlement fees

If you will incur early repayment fees on your current credits you may want to reconsider opting for consolidation. These settlement fees can be surprisingly high and may mitigate nay savings you would've enjoyed from consolidating your debt.

After reading the above on debt consolidation, we hope you’re more informed about whether or not it might be time or a good idea for you to make use of this debt management option.