Debt consolidation can be done in a number of ways. The basic idea is to replace some or all of your payments with a single regular payment, which most people find easier to manage. You could even end up paying less due to a lowered interest rate.
The beauty of this type of agreement is the fact that everything is put together into one payment, which not only saves you the headache of paying separate repayments all at different times, but it allows you to be much more organised in your financial situation.
Important facts about debt consolidation
Pay back less or lowered repayments but never both
If credit cards make up a significant percentage of your debt, then consolidating may increase your repayments. Credit card minimum repayments pay off the amount over a term of 7 to 11 years.
Most personal loans have a term of five years. To repay the same amount of debt over a shorter period of time, even with a lower interest rate, higher repayments will be required. Less total monies will be repaid.
Consolidating debt into a home loan will generally result in lowered repayments. This is due to the lower interest rate and the longer term (25 – 30 years). Extending the term of the loan from 5 – 11 years (credit cards and personal loans) will dramatically increase the total amount that you repay.
This can take a load off your shoulders if you’re finding it difficult to pay off each of your debts separately; this essentially cuts down time and management for yourself and allows you to focus on one payment a month.
Unsecured personal loan
When most people think about debt consolidation, they think about unsecured personal loans. One large personal loan is taken out to consolidate a number of smaller loans, such as credit cards and payday loans. The money from the loan is used to pay off your creditors.
You could experience these main benefits: a lowered interest rate, one regular repayment per month, and a shorter total repayment term. If you are consolidating credit cards, the interest is likely to be significantly higher than a personal loan.
Depending on the difference between the total credit card debt and the new loan, there may be overall savings, as well less stress with just one regular monthly payment.
To be eligible for a consolidation loan you would need to:
- Have a perfect credit history;
- Have been in the same job for more than one year;
- Have less than $50,000.00 in debt;
- Be up to date with all of your debts (not in hardship either); and
- Generally pay an application fee.
If you’re ineligible for a debt consolidation loan, then you may be eligible for other debt management options, such as personal insolvency agreements that provide a way of negotiating a reduced payout figure for those the owe large amounts of money. If you can’t afford any repayments, then bankruptcy may be an option.
At Debt Mediators we have a range of options that you can try before you fully consider going ahead with this kind of loan plan. We have our own calculator that you can try out to firstly gain at least a slight understanding of your situation and how you can manage your repayment load under this specific loan type.
You can learn here about the benefits and drawbacks of this type of plan that can make your financial situation better or even worse depending on the amount of debt you have and the situation you’re in.
If spending is a problem for you, then a debt consolidation loan may make things worse. We regularly see people who, after getting a debt consolidation loan, continue to use their credit cards.
NB: Debt Mediators does not provide loans. This information is provided for information purposes only.