Not only does debt consolidation simplify your monthly budget, it could save you thousands in interest charges. But, there are a few things you should know before you start consolidating your debt.
WHAT IS DEBT CONSOLIDATION?
Debt consolidation is when an individual takes out a single loan to combine and payback multiple debts. Bundling these separate debts into one loan–that typically carries a lower interest rate–can make it easier for you to manage monthly repayments and save you money.
Typically, debt consolidation is used to lower monthly repayments. It’s important to work out exactly how much you’re currently paying and compare it to the consolidated payment, if the new payment is higher it might not be a good idea to switch, even if having one payment is more convenient.
WHAT SHOULD I KNOW BEFORE CONSOLIDATING MY DEBT?
Consolidating your debt can have great advantages but there are things you should keep in mind before doing so:
You will need to qualify. Good consolidation options require good credit and a steady income to ensure you are able to pay your debt back.
Consolidating costs. Typically, there are set up fees included with consolidating your debt, so make sure you take the overall cost into consideration when assessing whether it’s a good option financially.
You may end up being in debt for longer. It’s common for consolidation loans to reduce monthly payments by extending the length of the repayment period. This could mean that you end up paying more over a longer period but that the monthly payments are more manageable.
Be careful with secured debt. Credit card debt isn’t tied to particular assets, but moving that debt to an asset, you home for example, means that if you can’t repay the loan, the bank could take your home.
If you have debt in multiple places and feel that you’re paying too much each month, or you’re losing track of your payments, consolidating your debt could be an effective solution for you. However, as always, there are pros and cons. It always makes sense to speak to someone who understands the subtle differences between plans and what will work best for you.
Speaking with a financial advisor can help you develop a solution that will work for your unique situation and help you improve your financial health.
WHAT ARE THE ALTERNATIVES?
There are other ways of dealing with debt, one of which is a Home Equity Loan. If you own a property, you can take our a home equity loan which will serve as collateral for the lender. This would work like a second mortgage with its own repayment terms.
HOW DOES DEBT CONSOLIDATION AFFECT YOUR CREDIT SCORE?
It’s important to be aware of how consolidating your debt can affect your financial future as well as your credit score. Missed repayments may indicate to lenders that you’re struggling to pay back loans which may make them less likely to lend to you in the future.
Applying for a debt consolidation loan will leave a mark on your credit report known as a ‘credit search’.
It’s always worth speaking to someone that understands the implications of debt consolidation and who can help you make the right decision.
If we can help you make the right decision when it comes to consolidating your debt, come and speak with us.