A Debt Consolidation Loan is any loan which is large enough to pay out your existing debts. A debt consolidation loan will leave you with one loan, to one lender with a one loan repayment. Many lenders, including some major banks and non-conforming lenders, offer loans to consolidate your debt. Certain lenders will even provide a Debt Consolidation Loan to people with a bad credit rating.
How Debt Consolidation Loans Work to Reduce Debt
So if you are borrowing the exact amount you owe, how do Debt Consolidation Loans save you money? Well, the answer is in the interest. If you are consolidating 4 different lines of credit, you are also paying 4 different sets of interest and fees. Over time, this will add up. By paying it all off with money from one lender, you will only have one set of interest and therefore paying less over time.
In this example, someone has $31,000 worth of debt outstanding over 5 years. With the different interest rates and fees involved, the total amount payable at the end of the 5 years is $45,895.
|Amount Owed||Interest Rate||Fees||Time Remaining||Total Amount Payable|
|Credit Card 1||$3,000||19%||$10||5 years||$5,252|
|Credit Card 2||$5,000||21.3%||$10||5 years||$8,736|
|Car Loan||$23000||13%||$10||5 years||$31,907|
|Total Debt||$31,000||5 years||$45,895|
|Debt Consolidation Loan||$31,000||9.85%||$5||3 years||$36,015|
However, this person was able to consolidate their debts with a loan for $31,000 over 3 years with a better interest rate. So not only is the debt paid off sooner, but the total payable amount at the end of that time is $36.015 which is a saving of $9,880. (Always consult a financial professional before making any decisions regarding your personal finance).
When Should I Look at Using One?
Debt Consolidation Loans are most effective before your debts are an issue. You still need to be able to comfortably make the repayments for the term of the loan. Also if you have been struggling to repay your debts, you may have judgements and defaults marked on your credit file, which will limit your borrowing options. If you are starting to feel the strain from your debts, a consolidation loan may help improve your situation.
Before you decide a debt consolidation loan is the best course of action for you, you need to consider your situation. If your debts have early payout fees, the costs of setting up your loan might outweigh the benefits of implementing one. It's always best to consult with a professional before you make any decision regarding your finances.
How to Apply for a Debt Consolidation Loan
Most major lending facilities will offer Debt Consolidation Loans. You need to be on the lookout for a loan which will make it worth your while to consolidate your debts so keep an eye open for low-interest rates, low fees and a little flexibility in case your circumstances change. If you already have a loan through a bank or finance company which is offering competitive rates they might be your first port of call. Many would welcome the opportunity to not only help you pay out your existing loan but lend you more money to increase their own profit margin.
Do your research before you make any loan inquiries. Each time you enquire about a loan, that enquiry is marked on your credit file. Several enquiries in a short period of time might turn potential lenders away. Make a short list of two or three lenders and only enquire with one at a time. Once you have found your lending facility you need to know exactly how much you need to borrow to cover off your debt. You also need to look at your existing debts to determine if you will be hit with early exit fees. Once you have all the information required, get in touch with a financial professional and ask for help. We can help you find a loan to suit your circumstances, even if you have a bad credit rating.
What if a Debt Consolidation Loan Won't Help?
If you wanted to use a Debt Consolidation Loan to help you get out of debt, but you don't think the savings will be worth it or your credit file is too badly impacted to be able to apply for finance, there are other options out there. Revive Financial can help you with an informal Debt Agreement, a Part 9 Debt Agreement and budgeting advice. To talk to someone about your financial situation call 1800 534 534 today.
For more information on Debt Consolidation, check out our Debt Consolidation page.