Debt Consolidation
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What is debt consolidation all about? You may well have heard people throwing the term around, but never had anyone properly explain it to you.
The basic concept is very simple. It’s all about consolidating several debts into one debt. In other words, rolling debts owed to different creditors / lenders / financiers into a single debt with a single creditor.
Juggling a home loan, credit cards, store cards (e.g. Myer Card), personal loans, and other debt repayments (e.g. outstanding electricity, gas, and telephone bills, and overdue school fees to list but a few) is difficult.
Consolidating all of these into one loan can make things a lot easier to manage!
Debt consolidation may be able to help you:
- Simplify your finances
- Get a repayment schedule that suits your budget
- Get a better overall interest rate on your loans
- Save you money
- Reduce your ‘debt stress’
- Save you from the debt collectors!
It makes a lot of sense… With one loan, at a competitive interest rate, and with a realistic repayment schedule…You save time, reduce stress, save money, and lower the risk of repayment default, a bad credit rating, and bankruptcy, not to mention debt collectors coming to knock on your door.
A debt consolidation loan is a particular type of loan that’s available from a selection of lenders. The debt consolidator (the lender that agrees to consolidate your debts) pays out / settles the debts you have (based on a consolidation plan / agreement). In return you enter into an agreement to pay back the debt consolidator.
You’ll find that certain loans will have certain interest rates. For example, a home loan’s interest rate will generally be less that the rate offered to you if you were looking for a personal loan (say, to purchase a boat, a couch, or some artwork). A credit card interest rate will generally be higher than that of a car loan.
Consolidating your debts allows you to break out of a cycle where you may find yourself only ever affording to make minimal repayments and getting stung with very high interest rates. For example, this can be true for people with large amounts of debt on one or several credit cards. You can feel trapped and a long term projection of your situation shows that you will take an extremely long time to become debt free.
Regardless of the various interest rates you were paying on your loans, the debt consolidator will almost always roll them into one loan, with a single interest rate.
Here are a couple of examples of how this can really prove beneficial in terms of how much interest you would pay and how manageable the repayments would be, bearing in mind the size of consolidation loan you require and your repayment capacity / budget.
Example 1: Secured Loan
Prior to debt consolidation Matt had 5 different loans that he was paying back each month.
| Loan Type | Amount Owed | Interest Rate | Monthly Repayments |
|---|---|---|---|
| Home Loan | $300,000 | 7.40% | $2,079.18 |
| Car Loan | $30,000 | 10.00% | $637.41 |
| Personal Loan | $20,000 | 14.90% | $384.82 |
| Credit Card 1 | $10,000 | 17.50% | $501 |
| Credit Card 2 | $5,000 | 14.50% | $240 |
| TOTAL | $365,000.00 | - | $3,842.41 |
After getting a debt consolidation loan, Matt’s monthly payments are reduced from $3,842.41 per month to $2,652.73 per month. Saving him $1,189.68 per month:
| Loan Type | Amount Owed | Interest Rate | Monthly Repayments |
|---|---|---|---|
| Home Loan | $365,000.00 | 7.90% | $2,652.73 |
| Monthly savings | - | - | $1,189.68 |
Example 2: Unsecured Loan
Prior to debt consolidation Dave had 5 different loans that he was paying back each month.
| Loan Type | Amount Owed | Interest Rate | Monthly Repayments |
|---|---|---|---|
| Car Loan | $35,000 | 14.00% | $814.39 |
| Personal Loan | $15,000 | 14.90% | $288.62 |
| Credit Card 1 | $15,000 | 15.50% | $760 |
| Credit Card 2 | $8,000 | 14.50% | $380 |
| Credit Card 3 | $3,000 | 17.50% | $160 |
| TOTAL | $76,000.00 | - | $2,403.01 |
After getting a debt consolidation loan, Dave’s monthly payments are reduced from $2,403.01 per month to $1,462.30 per month. Saving him $940.71 per month:
| Loan Type | Amount Owed | Interest Rate | Monthly Repayments |
|---|---|---|---|
| Personal Loan | $76,000.00 | 14.90% | $1,462.30 |
| Monthly savings | - | - | $940.71 |
What should I expect from a lender when looking to consolidate my debts?
A few things you should expect:
- One interest rate
- A single monthly or periodic repayment date
- A repayment schedule you can understand and that will work with your budget and capacity for making repayments. (This helps avoid broken repayment arrangements that can lead to financial penalties and default events).
Apply for debt consolidation now.