8 dos and don’ts of debt consolidation
Are your multiple debts getting too hard to manage and a little expensive?
A debt consolidation of payday loans may be what you need!
What’s that, you ask?
Well, a debt consolidation loan is a financial product that allows you to roll your personal debts into one and pay them off with one regular repayment over the loan term. Commonly, customers consolidate high interest debt like credit cards, personal loans and car loans in order to receive a lower rate and pay less in interest over time.
There are some tactics though when it comes to consolidating debt, to ensure you are actually saving money and in some cases, time as well. Because at the end of the day, there is no point taking out a consolidation loan if it’s going to end up costing more than paying off your debts separately.
Debt consolidation dos:
- Make sure you’re getting a lower rate: Rule number one when it comes to taking out a debt consolidation loan is that you need to opt for a product with a low interest rate. By reducing the amount of interest you are charged across your multiple debts, or even at least one of your debts, you are more likely to keep more money in your pocket.
- If you want repayment stability, fix that rate: A large number of debt consolidation loans come with a fixed interest rate, meaning it’ll stay the same over the life of the loan. This is beneficial if you want reliability when it comes to the amount you pay each regular repayment, because unlike a variable rate, a fixed rate doesn’t change with the market. The downfall here is, if you are on a fixed rate and your lender cuts rates, you won’t benefit, whereas variable rate customers might.
- Ensure you have flexible repayment options: Many lenders give borrowers the option of making weekly, fortnightly or monthly repayments, which means you can choose a schedule that lines up with pay day. Similarly, some loans allow you to make free extra repayments to help you pay down your debt sooner. In some cases you may also be able to make redraws on your additional contributions which can be handy if you’re strapped for cash. Just keep in mind, if you pay down your loan ahead of time, you may have to cough up an early repayment penalty cost, which can be hundreds of dollars.
- Check your credit score before applying: Before borrowing from the bank, it’s always a good idea to check your credit history to gauge where you’re at. It will give you an indication of how likely you are to be approved for a loan as well as give insights into what sort of rate you could be eligible for. Remember, some personal loan lenders offer tiered rates which reward customers with excellent credit by offering competitively low rates. However, if you fall on the other side of the fence and have bad credit you could be looking at a high interest, which may make consolidating debt not worth it.
Debt consolidation don’ts:
- Fork out too much in fees: There are a range of fees to think about when applying for a debt consolidation loan, including upfront application costs, ongoing service fees and exit or early repayment penalties. If the cost of applying and having the loan outweighs the cost of keeping your debts separate, it’s likely not worth it. So, start with a low rate, then try and find a loan with minimal fees to avoid paying too much.
- Roll your mortgage into your consolidation loan: A big don’t of debt consolidation is including your home loan. Unlike a credit card or personal loan, mortgage terms are set for a longer period of time (usually around 20-30 years). So rolling in your home loan could stretch out the time it takes to pay down your other debts and end up costing you more in interest repayments over time … and who wants to do that?
- Opt for a lengthy loan term: Speaking of lengthening your debt, if you can, don’t go for a long loan term. Remember, the longer you take to pay down your loan the more you pay in interest. As long as it doesn’t impact your everyday finances, try and keep your repayments similar to what you pay at the moment and choose a shorter term. This way you’ll avoid paying too much in interest as well as shave time off paying your loan – win, win!
- Miss your repayments: Like any form of borrowing, it’s important not to miss your repayments on your debt consolidation loan. Not only might you have to face a late payment fee each time you miss a regular repayment, you could also damage your credit rating, which could impact your ability to borrow in the future.
Want to compare debt consolidation loans today? Check out these top loan options below or head to our debt consolidation loan page for more.