If you’re paying off multiple loans and credit cards with different providers, a debt consolidation loan can help you manage your debt more easily. It could also help you save money and pay off your debts faster.
Here’s how they work, what to consider, and how they could help you get your finances back on track.
2 minute read
Debt consolidation involves rolling credit card, store card and other personal loan debts into one personal loan. The bank pays off your other approved debts, so you’re left with just one to manage and pay off.
For every loan, credit card or store credit you have, you’re probably paying different interest rates and fees. And if you’re only making the minimum repayments, the interest you pay could end up being much more than the original purchase or loan amount. Keeping track of multiple payments with different due dates can also be challenging.
Consolidating your debts into one personal loan means you only have one loan, one interest rate and one regular repayment. Personal loans often have lower interest rates than many other credit options, so you could pay less interest over the life of the loan.
You can also choose the term of your loan so that you have an end date in sight and set up an automatic transfer from your bank account so that you don't have to think about it.
Look at your statements or contracts to know exactly what you owe, and what fees and minimum repayments need to be paid to those creditors. It’s important to find out whether you’ll be charged additional fees for paying off any debt early. You also need to take into account any fees that your new personal loan might have.
If you have purchases on an interest free period, think about whether it’s best to consolidate that debt now or at another time.
There are two standard options when it comes to personal loans – secured and unsecured.
Use an asset you already own, generally a car, as security. Secured loans often have a lower interest rate, which could lower your repayments and help you pay off your loan faster. Some secured personal loans have restrictions around minimum loan amount, so make sure you read the terms and conditions.
You don’t need to have an asset – like a car – ‘secured’ against the loan. The interest rate could be higher and the amount you can borrow might be lower, but they can be easier and quicker to set up since the provider won’t need to validate the security.
When you’re taking out a personal loan specifically to consolidate debt, your personal loan provider might directly pay off your debts and it will be up to you to close all relevant accounts. In some situations, you’ll be paid the loan amount and pay the debts directly yourself.
This will be discussed in depth when you apply for a loan, so you’ll know the ins and outs when it comes time to consolidate.
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