A debt consolidation loan could save you serious money.
Debt Consolidation loans: What you need to know
A debt consolidation loan can be a great way to save money. But it’s important you understand how it works and what’s involved so that you make sure it’s the right decision for your situation.
Read on to get some valuable tips when considering a debt consolidation in Australia.
What is a debt consolidation loan?
Sometimes you might find yourself in a position where you have multiple loans at once. For example, you might owe money on two credit cards, have a ‘buy now pater later’ loan, a car loan and a personal loan.
A debt consolidation loan is where you roll up all of these loans into one easy to manage loan. Best of all, by combining your debts into one loan you can sometimes save money by getting access to lower interest rates and fees.
Let’s give you a real life example of a client we recently helped with a debt consolidation.
Our client had the following debts:
A bike loan owing $10,318.29 at 11.29% interest with 3 years remaining.
A personal loan owing $23,112 at 16% interest with 4 years remaining.
A credit card owing $2,500 at 19.99%.
Our client was paying $1,047.93 per month in repayments on this debt.
We searched for a debt consolidation loan from one of our lenders and, for direct comparison, found a 4 year loan with repayments at $946.97 per month and an interest rate of 10.19%.
That represents a saving of $100.96 per month and total interest savings of $1,334.47 over the 4 year term!
Because we also offer debt consolidation loans up to 7 years we were also able to offer this client a 7 year loan term with repayments of $621.28 per month. This reduced their monthly repayments by $426.65 per month which was one of their key objectives.
This is a great win for our client and will allow them to get into a better financial position more quickly.
Another real life example was a customer having 3 credit cards and rolling them into a personal loan, here are the savings:
A credit card with a limit of $10,000, balance owing $9,700 interest rate 24.99%.
A credit card with a limit of $4,500, balance owing $4,000 interest rate 18.99%.
A credit card with a limit of $10,100, balance owing $9,100 interest rate 19.99%.
Our client was paying $533.89 per month in repayments on this debt.
We are able to offer this client a 7 year loan term with repayments of $418.12 per month and an interest of 9.49%. This reduced their monthly repayments by $115.77 per month and total interest saved was $4,785.99!
What are the Pros and Cons of a debt consolidation loan?
Pros
Save Money
As shown in the example above, if you can get a lower interest rate when you consolidate your debts you could save a lot of money. Also, in many cases you are probably being charged a monthly or yearly fee for the loan. If you can just have one loan you might be able to save a lot of money in ongoing fees.
One simple payment
The big problem with having multiple loans is keeping track of when the payments are due. Consolidating down to just one loan will make it really easy and simple to manage the repayments.
Clarity around your debts
Having one loan means it’s easy to work out your current debt situation. If you have multiple loans it’s easy to lose track of your current situation because you have to add up the debts from all different lenders.
Cons
Costs
It’s important to factor in all the costs of changing your loans. Some lenders might have exit fees or other costs and you need to factor this in when considering if a debt consolidation loan is for you. We help our clients work this out when we assist them with a debt consolidation loan to ensure they are making the right decision.
3 tips when considering a debt consolidation loan
Tip 1: Do not shop around
Applying directly to lenders can negatively impact your credit score as hard checks are performed upfront.
Hard credit checks are a formal credit enquiry and therefore can drop your credit score.
Instead of applying to many lenders yourself, use an online loan service like nmoni. In minutes we can check your loan requirements with our panel of lenders who have the best and most competitive rates which can help you save serious money. Importantly, we won’t hurt your credit score.
Tip 2: Check the fees and charges
It’s important you understand all the fees and charges associated with a debt consolidation loan.
The reason this is important is that you may be lured by some lenders with a really low interest rate.
What you might not know upfront is that there are a lot of fees and charges associated with that new debt consolidation loan that make the rate effectively not very good.
So, while it’s important to ensure you are getting a great rate, you also need to be mindful of the other costs of the loan.
Also, make sure you understand any fee’s or charges associated with paying off the loans you are consolidating so you can make an informed decision.
We can of course help you with this because we lay out all of these fees and charges for our clients so that everything is transparent and there are no nasty hidden surprises. You’ll find it easy to compare your debt consolidation loan with your current loans because everything is fully disclosed. It’s just one of the advantages of using nmoni.
Tip 3: Secured or unsecured.
One thing to consider when getting a debt consolidation loan is whether you should get a secured or unsecured debt consolidation loan.
A secured loan is secured by an asset like a car or a boat. Secured loans typically have lower interest rates because they are less risky for the lender. Taking a secured loan may also allow you to borrow more money depending on your situation.
One thing to be mindful of is that if you default on your secured loan the lender may repossess the asset you put up for security.
An unsecured loan is the opposite of a secured loan in that you don’t have to put up an asset as collateral. Generally these loans have higher interest rates because there is more risk for the lender. The upside is that you don’t run the risk of losing your asset if you default.
We can help you make this decision depending on the asset you may have and your situation.
If you need help working out if a debt consolidation loan can save you money apply here. It takes less than 10 minutes to complete our application. You can then sit back and relax while we check your loan requirements with our top panel of lenders. Importantly, this process will not hurt your credit score.
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Written by Michelle Gorsevski