The Ins and Outs of Debt Consolidation

What do you know about debt consolidation?

This is the first question you should ask yourself before deciding whether this type of lending is right for you and your finances. While debt consolidation may seem to be the answer to your problems in times of financial stress, there are some key factors you need to consider before jumping onto the consolidation wagon.

Firstly, it’s good to find out what it means for you. Debt consolidation is a type of loan that combines separate, smaller loans into one manageable repayment package. These types of smaller loans may be anything from credit card debt to previous personal loans. However, the loan doesn’t cover ALL debt, as you may think.

Like any loan, a lender or broker will assess your situation and determine whether you can qualify. In this case, your eligibility will be determined by the type of debt you have and how you have previously conducted yourself in trying to resolve it. And like any loan, there are the ins and outs for you to consider.

The Ins:

•    Easier to Manage

Debt consolidation allows you to focus on one manageable repayment package, rather than having multiple accounts to keep track of. With this is mind, this loan makes budgeting easier as you don’t need to try remembering various payments due on different dates.

•    Lower monthly repayments

Compared to what you may already be paying, the consolidation of your debts will most likely reduce your monthly repayments. As the loan is designed to improve your cash flow in the short term, you might find yourself with extra money at the end of the month you previously wouldn’t have.

•    Lower interest rates

When paying off a lot of debt spread across various loans or credit cards, you may find you have been paying hundreds or even thousands of dollars in other charges. When lumped together in one repayment package, you will most likely receive a lower interest rate compared to paying across multiple accounts.

The Outs:

•    Potential for more debt

With more money at the end of the month, there is the temptation to go out and spend it. This, however, will land you in more debt. A smart consumer will save the extra or put it towards paying off the debt when they can.

•    You might end up spending more in the long run

Debt consolidation loans generally extend over a long period. Even though the interest rate is low, the longer it takes to pay off the loan means that the interest paid may be more than the interest on your original debt. You will need to stay organised and pay off the loan as quickly as you can to not get caught in this trap.

•    Resolves the symptoms of debt, but not the issue

Debt consolidation works to combine debt into one manageable account so you can breathe easier in the short-term. It doesn’t, however, solve what created the debt in the first place. Identifying the problem behind your financial stress, and working to address it, will allow you to get back on track after your loan is repaid.

Taking into consideration the ins and outs of debt consolidation, it is a good idea to approach a reliable mortgage broker to discuss the options available to you. In the long run, it takes an organised and smart consumer with good advice to consolidate their debts and rise out on top.

At Select, we offer no-obligation, quality and free advice to help you reach your financial goals. To find out if debt consolidation is right for you, organise an appointment to talk to one of our friendly brokers about your options.