Firstly, what is a debt consolidation loan?
A debt consolidation loan is often one of the first solutions that people who are unfamiliar with their options turn to when they are in financial difficulty as it may seem like the most logical (easy and simplistic) option. Like every route out of debt a consolidation option does have its drawbacks.
Because a consolidation loan involves taking out one new loan to pay off your current loans, your new consolidation loan would usually be a secured debt rather than unsecured. A secured loan could be against your home or any other asset, this means you many have to pay application fees, legal fees, valuation and/or stamp duty.
The debts that you are consolidating may not always be secured ones so you could be weakening your position by offering your house to support a secured loan when you previously only had unsecured debts like money owed on credit cards. This is not always a bad thing, however, to ensure that you find the absolute best pathway out of debt you should speak to one of our debt councillors who will help ensure that you consider the most viable options for your specific situation.
Lots of people who have debts often try to self-manage the problem using a type of consolation loan option, the 0% rate ARP transfer offered on many credit cards. This can be an effective solution in some instances but not without its dangers. Speaking to a debt councillor will enable you to explore more effective options.
If you do decide to setup a debt consolidation plan yourself, make sure your new interest rate, including fees and costs total less than what you’re paying on all the debts you are consolidating. A debt consolidation loan should also always have a fixed interest rate providing more structure and helping focus entirely on repaying the debts.
You can also try to negotiate with creditors as you consolidate your debts, however, this is where our trained and experience debt counsellors really come into their own. They understand the laws, regulations and best practise within every single debt industry and are much more likely to negotiate a healthy reduction than you will on your own. Our debt counsellors are also able to help with some of the more unpleasant aspects of debt, for example, when setting up a consolidation plan we can ensure that the people who you own money to no longer call/contact you giving you piece of mind and helping you deal with some of the less pleasant elements of been in debt.
While any company can provide negotiation or consolidation services, you could even attempt to set things up yourself, we will provide a complete solution for managing your finances and staying out of debt, it’s not just a one-time consultation it is a change in the way you manage finances to avoid any more money issues in the future.
While the benefit of consolidating credit card debt onto a single new card with 0% APR may provide you with a great deal of emotional and financial relief, it may also leave you feeling prematurely confident about your financial situation.
Many times people who have accumulated large credit card debts escalate the problem using a 0% APR transfer as it actually frees up the available credit once again while keeping the totally accumulated debt on a new card.
A well put together consolidation arrangement would consider, but not necessarily always recommend, closing credit accounts you have with stores, businesses or credit card issuers to make sure that you don’t increase your debts while paying off the consolidation loan. Sometimes a sensible option is to keep a single credit card with a low credit limit for emergencies but this is something to be discussed.
The real downside of consolidation loans
While unsecured personal debt consolidation loans used to be quite common, they are less likely to be available to people who need them today. Most debt consolidation loans are now offered from lending institutions and secured as a second mortgage or home equity line of credit These require the individual to put up a home as collateral and the loan to be less than the equity available.
Another real kicker with consolidation loans is that lenders typically approve those who have high incomes and are responsible with their finances, so if you’re in debt for being careless with your money, you may receive a higher interest rate or not qualify at all.
On a psychological level, a consolidation loan, on its own, similar to a 0% APR credit card might not help. In order to be effective a consolidation loan should be accompanied by a monthly spending plan and budget, the false relief that these loans offer can make it easy to continue relying on credit and get further into debt.