Debt Consolidation Loans

If you’ve been hitting your credit cards hard and have longstanding debts that cost you money, then now is the time to apply for a debt consolidation loan, perhaps one of the easiest and cheapest ways to pay off your debts and start saving money by paying less interest. So who exactly needs a debt consolidation loan? They are designed for people with an existing debt (or multiple debts) that may have been accrued through irresponsible spending on credit and store cards. They are most ideal for people paying significant amounts of money per month servicing their debts, but not actually clearing any of the balance.

A debt consolidation loan typically has a low interest rate, which reduces the amount you pay in interest each month. By cutting the amount of interest owed you can then start to clear the balance much faster!

Debt Consolidation Loans: What You Need to Know Before Applying

A debt consolidation loan can be a great way to get your finances under control and reduce your debts, however there are a few things that you need to be aware of before going down this path.

The strategy of consolidating your debts works by taking all of your existing debts and rolling them into a single debt. The idea is that the new loan will have a lower overall interest rate than you were paying on your existing loans and credit cards, and be easier to manage.

Consolidating your debts by taking out one loan can be a great way to get out of debt sooner, but you need to follow a few rules to ensure the process is a success. And it’s this that we’re going to go into more detail on.

Types of Debt Consolidation Loans

There are a number of different loans you can use to consolidate your debts. If you have a mortgage and have some equity in your home, a home equity debt consolidation loan can provide you with a great interest rate. If you don’t have a home with any available equity, the next best option will generally be a personal loan.

Debt consolidation – personal loan: A personal loan used for debt consolidation is much the same as any other personal loan. Generally the loan will be unsecured, which means the debt is not secured by any particular asset or group of assets.

A personal loan for debt consolidation will generally have a fixed interest rate as well as a fixed term. The benefit of this is that you know exactly how much your repayment will be each month for the life of the loan.

Another benefit of having a fixed term is that it forces you to repay your debts within a certain time frame. A credit card debt can live forever if you keep using the card, but a personal loan has a specified end date, and provided that you maintain the monthly repayments you can be assured that the debt will be extinguished by the time you reach the end of the term.

Debt consolidation – home equity loan: By using the equity in your home you can consolidate all of your credit card and personal loan debt into your home loan, which will generally give you access to the lowest interest rate available.

A debt consolidation loan using home equity can reduce your overall monthly payments significantly, but it is important to remember that your debts are now being spread across a longer period of time – potentially up to thirty years. So you may be paying a lower interest rate, but it will be paid over a far longer period of time.

Choosing a Debt Consolidation Loan

There a numerous factors that will help to determine what type of debt consolidation loan is best for your needs and objectives.

The interest rate will generally be the first factor taken into account. To consolidate debts successfully, the interest rate paid on the new loan must be lower than the overall interest rate you are paying on the debts to be consolidated. For this reason, consolidating your debts into your home loan can be a great option if you have sufficient equity in your home, but for the rest of us a personal loan will generally be the only option. When choosing a personal loan you want to find the one with the lowest interest rate, but you also need to ensure the loan does not feature high upfront or ongoing fees that will offset the interest rate saving.

With any debt consolidation loan your aim should be to repay the loan as quickly as possible, so you also need a loan that offers flexibility in allowing you to make extra repayments as well as repaying the loan early without large exit fees.

Tips for Repaying Your Debt Consolidation Loan

If you are taking out a debt consolidation loan, you are most likely doing so to get yourself out of debt faster. There are a couple of ways that you can repay your loan more quickly than usual.

Don’t lower your monthly repayment: When consolidating numerous high interest debts into a single low interest debt, you will generally find that your minimum required repayment will be significantly reduced. The biggest trap that people fall into is to reduce their monthly repayment to the new minimum, while putting the savings towards lifestyle expenses. The first rule of a successful debt consolidation is to maintain – or even increase – your monthly repayment to the new loan. This is the best way to maximise the benefits and to get out of debt sooner.

Cancel or stop using the credit cards being consolidated: Many people take out a debt consolidation loan with the best intentions, but unless you cancel any existing credit cards, or stop using them (some people cut theirs up or put it in a glass of water and freeze it), the temptation to use them will always be there now that the full limit is available again. Whenever consolidating outstanding debt from credit cards or store cards onto a single loan, you should ensure that you are not using those cards any more so that you cannot create more debt with them.

Make fortnightly repayments: Fortnightly repayments are an easy way to repay any loan sooner. Simply divide your monthly repayment by two and pay that amount each fortnight. By doing so you will make 26 half repayments, which is equal to 13 full repayments. This means you are making one extra monthly repayment per year, which will save you interest and help to repay your loan sooner.

Typical Debt Consolidation Loan Features

Upfront fees: Most loans used to consolidate debts will have an establishment fee or application fee. These can vary greatly between lenders, so it is important to compare fees between the loans.

Ongoing fees: It is common that loans will also feature an ongoing monthly fee. Obviously it is ideal to find a loan with no fees or low fees to maximise the benefits of your debt consolidation, but in their absence seek out a loan with as few fees as possible.

Interest rate: The interest rate on your loan will have a major impact on your monthly repayment. The lower the interest rate the better, but when comparing interest rates you also need to take into account the upfront and ongoing fees to ensure the overall cost of the loan is competitive.

Flexibility with repayments: When taking out a any loan your aim should be to repay the loan as quickly as possible. To do this you need a loan that allows more frequent repayments (weekly or fortnightly) as well as additional lump sum repayments. It should also allow you to repay the loan early without heavy exit or break fees.

Loan term: The loan term dictates how long the loan can be repaid over. A longer loan term will give lower repayments, but remember that you will then be paying interest over a longer period of time which can mean you end up paying more due to additional interest.