Debt Consolidation Loans | It’s Time to Master Your Finances

If the thought of having several different debts in a variety of different places makes your palms sweat, then a debt consolidation loan might be for you.

What is debt consolidation?

Debt consolidation is the process of rolling all of your existing debts into one new loan. A debt consolidation loan is a way to simplify your debts and organise them into one package.

When is debt consolidation a good idea?

If you have several different loans and a credit card or two on the go, chances are that each of these debts have their own set of fees, differing interest rates and out-of-sync repayment schedules. It is no doubt confusing, and at times, overwhelming to keep track of how much is owed, to who, and when. Plus, missed repayments can cause financial strain and stress. Consolidating your debts into one loan can save you time, energy and potentially money. By doing this you will only be subject to one set of fees and one interest rate, and you’ll only have one repayment schedule to focus on. However, before you consolidate your debts, it is important to ensure that you are in a position to comfortably and consistently repay your debt consolidation loan on time.

What are the advantages of debt consolidation?

Debt consolidation can:

  • provide you with greater control over your finances – help with budgeting and cash flow
  • simplify the repayment process
  • help you pay off your debts sooner

Can debt consolidation hurt your credit score?

Securing a debt consolidation loan may initially harm your credit score, as lenders generally consider new credit to be new risk. However, the good news is, if you manage to stay on top of your repayments and maintain a satisfactory repayment record, your credit score is likely to recover and may even improve over time.

Can debt consolidation save you money?

Consolidating your debts may save you money in the long run. For example, instead of paying interest on several different debts, you can potentially maximise your savings by only having one interest rate to service, and one set of fees to pay.

However, be sure to do your homework (or ask your mortgage broker to do it for you) and compare the interest rate and fees associated with the new loan you’re considering, with the interest rates and fees linked to your current loans. Also bear in mind that some lenders may charge penalties if you pay off your existing debts ahead of schedule, and other fees and charges may apply upon securing the new loan. Stamp duty and taxes may apply if you are using your home to secure the new loan.

Types of debt consolidation

There are secured and unsecured debt consolidation loans.

An unsecured debt consolidation loan, also sometimes referred to as a personal loan, is one that is not secured against an asset. Interest rates associated with unsecured loans are generally higher and these types of loans are usually harder to obtain, as they involve a higher level of risk for the lender.

A secured debt consolidation loan is one that is secured against something you own, like your house, a car, or another asset. In the event that you are no longer able to make loan repayments, the lender can then sell the asset that the loan is secured against to recover the debt. Secured loans generally have lower interest rates than unsecured loans, however, there is of course the risk of losing your asset if you can no longer make your loan repayments.

Tips on servicing secured debt consolidation loans

If you opt for a secured loan and choose to roll your debt consolidation loan into your home loan, be aware that this may extend your loan term and hence the length of time that you are charged interest. To avoid having to pay interest over a longer period, consider treating your debt consolidation loan and your home loan as two separate loans. Make additional repayments on your debt consolidation loan where possible, to pay it down quicker, rather than just paying the minimum amount.

Where to start with debt consolidation

If you’d like to learn more about the various ways to consolidate your debts, the loan options available to you, and the difference between secured debt consolidation and unsecured debt consolidation, contact your local MoneyQuest mortgage broker. They can assess your financial situation and guide you through the process step by step. As always, we recommend chatting to a finance professional before making any decisions.



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