It’s easy to become overwhelmed debt and repayments, especially if you have several loans or credit cards with different lenders. Reducing outgoing repayments can help to reduce financial stress, making repayments more manageable and potentially removing high interest costs.
In this blog, you’ll find some information on how to consolidate your debt and habits to follow to stay on top of your debt.
What is a Debt Consolidation Loan?
As the name suggests, a debt consolidation loan rolls your outstanding debts into one loan to help reduce the outgoing monthly repayment. This type of loan has advantages of potentially lowering the interest rate from what you have been paying on credit cards or other loans, lowering any monthly or annual fees payable on different accounts and helping make your debt level more manageable through one repayment.
What are the disadvantages of Debt Consolidation?
Before you rush out and start a debt consolidation loan, you need to take a few steps to ensure it is the right option for you. Different lenders offer different interest rates, establishment fees and monthly costs, with some charging an early exit fee if you pay out the loan early.
Check the following information on your current debts you are wanting to consolidate.
- Check the loan contracts for any exit fees and take this cost into consideration with the new loan.
- What is the interest rate you are paying on your current loans.
- Does the current loan allow you to pay out early with minimal cost.
- Are you going to get a benefit from consolidation existing debts
How to consolidation debts
The first option most people tend to use is a debt consolidation loan. This is essentially a personal loan to cover outstanding debts and allows you to lock in the interest rate and repayments for the loan term which can help when sticking to a budget. The loan term can range from 1 to 7 years depending on your budget.
Benefits of a Personal Loan Debt Consolidation
- Removes other higher personal loan or credit card interest rates
- Removes monthly fees over multiple accounts
- Easier to manage repayment
How to stay on top of debts
A Debt Consolidation loan does not remove your debt entirely. It helps you manage your monthly expenses and can reduce the total interest component you would pay over time over multiple accounts. It is advisable though to adopt sensible money skills to avoid relying on debt consolidation loans. A few steps to follow:
- Know your budget.
A coffee here, a coffee there…By knowing where your spending your money, you can manage spending to help pay off your debts sooner.
- Have a backup
Having a backup or emergency fund will help remove stress if an unexpected expense pops up. This will save you having to use credit cards.
- Small to Big
Paying off smaller debts first can help if you’re setting a goal. Once the smaller debt has been paid off, you can focus on the next debt and so on. Remember to direct the excess payments you had been making towards the next debt to keep the momentum moving.
- Extra Payments
Making additional or higher loan repayment can make a significant difference to the amount of interest you will pay and how long you will have the loan for.
(As an example: On a $20000 loan over a 5 year term, by paying an extra $10 per week on top of your loan repayment, you could reduce the loan term by up to 7 months and reduce the interest payable by approximately $1100)
So with inflation, 1 really nice coffee per week could save you up to $1100
- Extra Money
From time to time, you may come into some extra money. Consider using this to pay into your loan or clear out smaller debts.