Debt Consolidation Loans – When to Combine Your Debt Payments into One Loan

debt consolidation loans

We know life is complicated. You have so many responsibilities and things you need to do (and pay for). Groceries, school fees, rent, car repairs – add multiple credit cards, mortgages, and personal loans into the mix, and you have a fairly complex schedule of bills.

If you’re constantly juggling payments and trying to organize your finances, consider simplifying your life with debt consolidation. By combining costs, you’ll be able to manage your repayments and your budget more easily. You can get out of debt sooner with one payment plan and one interest rate that will help save you money and start you on your path to a brighter financial future.

However, there are a few things you should know before you consider debt consolidation loans. Below are some key terms and checklists to look over while you’re deciding whether a personal debt consolidation loan is right for you.

How Does Debt Consolidation Work?

Debt consolidation loans allow you to combine all of your existing debts into one outstanding loan, with a single payment and one interest rate. This allows you to focus on paying off your loan in one go, so you can spend your time and energy on other aspects of your life.

Debt consolidation loans can include:

  • Credit cards
  • Store and charge cards
  • Personal loans
  • Car loans
  • Small debts
  • Other credit accounts – Electricity, phone, utilities, etc.

These debt consolidation loans are tailored to your individual financial needs, lifestyle, and budget. However, there are some negatives that may come along with the positives if you aren’t well-informed, so it’s important to understand what you’re signing up for.

Would Debt Consolidation Be A Good Choice For Me?

Debt consolidation loans offer the opportunity to take out one loan to pay off all of your other loans. This can include multiple credit cards, personal loans, car loans, and more. If you have debt accruing from multiple sources, an easy debt consolidation loan can be a great choice. Rolling over all of your various debts from a car loan to a credit card into one easy-to-manage personal loan saves you the stress of multiple payments and makes it easier to track your debt repayment process.

It may be tempting to pay only the minimum balance on your credit cards, but the interest will add up substantially over time. Another reason to choose personal loans for debt consolidation are big savings on multiple interest rates. Your monthly interest rates could be drastically reduced, especially if some of the debts you’re consolidating have a high rate of credit.

How to Calculate New Rates

Some things to look at are:

  • Monthly interest rates
  • Repayment amount
  • How long you think it will take to pay off the total (including accumulated interest)

Calculate how much you need to borrow to cover your total debt amount. Make sure this includes all interest and fees to pay off your debts early. Many banks and financial institutions have calculators for this online if you don’t feel like doing it by hand. Once you have it all calculated out, see how it would compare to a debt consolidation loan. If the consolidation loan is substantially less, then it’s safe to say it will be a great option for you!

Example Scenario

Andrea has a credit card with $10,000 outstanding, a second card with $5,000, and a car loan for $15,000. Instead of making three payments at different times of the month and paying three separate interest rates, Andrea can consolidate all three amounts into one $30,000 personal loan. This personal loan for debt consolidation has one regular payment and a lower interest rate than that of the combined loans, which saves her money and makes it easier for her to plan out her budget in advance.

Things to Consider Before Consolidating Your Loans

Only sign up for a new loan if it’s without a doubt the best option financially for you, and you’re sure that you can pay it off in the time required.

If you’re having trouble paying back your loans, consider talking to your loan provider to see if they can work out an alternative payment plan or extend your loan period. This would be easiest to try with your utility provider if you’re behind on electricity, phone, or other utility payments. If you’re struggling with multiple credit card payments, you may also be able to get a credit card balance transfer, but this may not make financial sense for your situation. Seek financial counselling if you’re confused about what’s best for you.

The most important thing is to avoid getting deeper into debt. If you will get access to more credit through a consolidated loan and you’ll be tempted to spend more, think about the long- term implications. Also think very seriously about using your home as an asset. Refinancing your home is not a good option if there’s any doubt that you’ll be able to pay your debts back in the time period required by your loan agreements.

What to Watch Out For When Finding a Debt Consolidation Loans Solution

First of all, make sure your lending company or broker is licensed! You can check the legality on ASIC Connect’s Professional Registers.

If you’ve decided that debt consolidation is right for you, make sure you know exactly what you’ve signed up for. You’ll want to ensure that you’ve chosen a debt consolidation product that will allow you to pay off your debt with less interest and in a shorter timeframe than paying each loan off separately. Make sure you do some calculations to be sure you’re getting the best deal! You want this to be a long-term solution that will help you get out of debt, not a short-term solution that just seems to make the problem go away.

Choosing a Lender

You should also avoid companies who make unrealistic promises about getting you out of debt. We pride ourselves on transparency and great customer service. Make sure you look for this in a debt consolidation company. If you are asking a lot of questions and they’re not answering,get a second opinion.

Be wary of a company that:

  • Rushes any transactions or pressures you to sign
  • Refuses to discuss repayments
  • Asks you to sign blank documents
  • Won’t put interest rates and loan costs in writing
  • Tries to push you into signing a business instead of a personal loan

Debt solution companies can make big promises, but they may not be able to save you from major financial problems. Before putting up your house as an asset on a secure loan, make sure you are able to pay the loan off.

Hidden Fees

Make sure you read the fine print when signing up for debt consolidation loans. Don’t just look at the fine print! Check for hidden fees. Some of these may include:

Application fees – Some providers may charge an administration fee and/or a credit check fee to assess the level of risk in providing you with a debt consolidation loan. Some may even charge legal fees or valuation if the new loan is secured against your home, car, or other assets.

Ongoing fees – There may also be a small monthly fee. If you plan on paying off your debt quickly this may not be a big issue, but if your loan is substantial this will add up quickly and is something to consider.

Break cost fees – If you sign up with a fixed rate loan, make sure you’re aware of any break cost fees. This fee goes into place when you pay off your loan early, which should be a good thing! You don’t want to pay off your loan just to find another bill for an unexpected fee.

How Do I Consolidate My Loans Into One Loan?

When working on a small debt consolidation loan, there are a few key terms that are very important. You’ll need to decide on your type of loan while paying careful attention to your repayment options, and then you can set up automatic payments.

Step 1 – Decide on Your Type of Loan

It’s important to understand the differences between debt consolidation loans. Making the wrong choice could end up costing you more instead of saving you money, which really defeats the purpose! Take time to consider your options.

Unsecured Loans

This is the simplest type of debt consolidation loan because no security is needed. If you don’t have any assets, or you’re unwilling to put your car or home up as collateral, this is a simple solution. However, with unsecured debt consolidation loans you could have to pay higher fees and interest rates.

Secured Loans

A secured loan requires you to put up some kind of asset (car, boat, house) as security for your loan. In exchange, the lender may offer a lower interest rate and fees. Make sure you’re financially able to repay this type of loan, or your asset might be repossessed.

Fixed Interest Rate

This type of loan has a rate locked in for the life of your loan. This allows you to pay back the entire amount of the loan by a set date in the future. Be aware that this type of loan generally comes with break cost fees, which means you’ll have to pay extra if you want to pay the loan off early. There also may or may not be the option of making extra payments, so make sure you ask the right questions before signing on.

Variable Rate

A variable rate loan is much more flexible than a fixed rate. These generally have lower interest rates and fees, but the interest rate changes based on the market. If you want the flexibility of extra repayment options or early repayment, this could be the right option for you.

Option – Extra Repayments

Wouldn’t it be great to put a little end-of-year bonus or unexpected raise money towards your loan? Make sure the debt consolidation loan you choose gives you the option of paying extra into your loan.

Step 2 – Set Up Automatic Payments

This one’s a no-brainer. If you’ve had issues remembering your payments in the past, make it a thing of the future! Most lenders allow you to easily set up your weekly, fortnightly or monthly repayment with an automatic direct debit to ensure you never forget a payment.

Other Tips for a Successful Debt Consolidation

After you’ve signed on for your loan and your payments have been combined, work out a new budget and stick to it. Remember that while your debt may seem less daunting, it’s still some time away from being entirely repaid. Figure out some ways to cut down on your expenditures so you can knock out your debt quickly.

  • Create a visual reminder of your debt, like a progress bar on your bedroom wall
  • Close your old credit card accounts to avoid recurring service charges or annual fees
  • Remove your credit card numbers from online accounts (so you have to work harder, no one-click purchases)
  • Cancel unused club memberships and unnecessary magazine subscriptions
  • Shop for cheaper insurance (auto, home, etc.)
  • Use your remaining credit card(s) wisely
  • Switch to a cheaper phone plan
  • Master the 30 Day Rule (wait 30 days to decide on a major purchase)
  • Write a list before grocery shopping (and stick to it)

Get Started Consolidating Your Debt

When done right, debt consolidation offers peace of mind. Even if you’re pretty good at managing your money, debt consolidation gives you some breathing room and space in your budget to build new and improved financial habits.

Save money on fees and interest rates. Budgeting is easier with one regular payment. Consider a debt consolidation loan today.

If you have any questions on small or medium personal loans, contact our loan specialists at Nifty Loan today. We pride ourselves on transparency and great customer service, and we’re always available to help you reach your financial goals.