debt consolidation

These days, a lot of people want to consolidate debt, but what does this actually mean? The theory is that by bringing all your debt together into one payment, the debts would be cheaper thus providing a benefit. This theory is correct in some cases, but not all. 

For instance, consolidating credit card debt with a personal loan may provide a benefit, but there are some crucial factors to consider first:

1. Personal Loan Or Other

Will I get the personal loan? Personal Loans can be difficult to get in a lot of cases. Credit providers look at a wide range of factors, including (but not limited to):

  • Employment
  • Credit History
  • How you have been managing the debt i.e. are your credit cards paid on time
  • Assets

It could be argued that if all your debts were paid on time, why would you need a personal loan to consolidate debt? Nevertheless, this is in most case a key factor in whether to approve a personal loan or not.

2. Cost of The Loan

Another factor to consider is the cost of the loan. A lot of loans these days have application fees and account keeping fees and of course the interest rate. All these fees and charges dilute any benefit. This being the case, you need to ask yourself whether the benefit is there before you go through the hassle of applying for a personal loan

In addition to this, you need to choose your credit provider very carefully. In most cases, if the lender is not a bank the interest rate will be higher. There are a lot of online comparison websites that can make looking for a loan easier and it's important you do your research.

3. Consolidating Your Debt

One thing that I see often is when people get a personal loan with every intention of consolidating their credit cards, but then the credit cards aren't cancelled. In no time at all, the credit cards are used and before long you have double the amount of debt than you had before. The same thing happens when you transfer a balance from one credit card to another to take advantage of a no/reduced interest promotion and the first credit card is not cancelled.

Even though this situation is easily avoidable, for people that have pressing needs an additional line of credit is a powerful temptation not easily avoided. In this way, the additional line of credit provides an artificial sense of wealth.

4. Due Diligence

Finally, when it comes to a debt consolidation loan it does not pay off your debt in full, rather it simply swaps your bad debt for different bad debt. You still need to pay interest and you still have to pay the debts off. The reality is the debt has just changed and it does not address any spending habit issues that may exist.

The key message of this article is not to disparage personal loans for debt consolidation; rather you just have to be very mindful of the traps you could fall into if you are not careful.

If you need any help managing your debts, please don't hesitate to contact our debt consolidation specialists on 1300 332 834 or leave an enquiry for more information.