Debt consolidation is the process of combining all outstanding debts into one single loan. As with any other financial product, it may or may not work for you.
The key is knowing what to look for to ensure you’ve made the right choice for your situation. Here are some top questions about debt consolidation:
Top 12 Questions about Debt Consolidation
1. What is debt consolidation?
Debt consolidation is a financial strategy that allows you to combine multiple debts—such as credit card bills, personal loans, and other unsecured debts—into one loan with a single payment plan.
This can often result in a lower overall interest rate and easier debt management.
2. How does debt consolidation work?
To consolidate your debts, you would typically apply for a new loan that covers the total amount of your existing debts. Once approved, you use the funds from the new loan to pay off your other debts.
This leaves you with just one loan to repay, often with a lower interest rate and a more manageable monthly payment.
3. What is the primary purpose of the loan?
Before taking out any form of loan you should ask yourself whether you need it or not.
If you see debt consolidation as a way to control your debts or bills that have become difficult to manage, then it could be a great decision. However, it might be wise to think again if it’s just to increase your borrowing capacity.
Additionally, if you’re considering taking a loan to pay your utility bills, you should first discuss the matter with your provider. They might be able to organise a payment arrangement to help you out.
4. Can I afford to make repayments?
Borrowing more money means either your repayments will increase, or the length of time you will be making repayments will increase.
Either way, you should be certain that you have the means to afford repayments, and a stable income to ensure that you can continue to make repayments into the future. You are responsible for these loans in case of non-payment or defaults.
Arguably, the most important question about debt consolidation is whether you can afford it. So be sure to consider:
- Have you budgeted carefully and accurately?
- What impact will a debt consolidation loan have on your financial situation?
- Will it help you manage your finances better or cause you to lose absolute control of them?
- Have you taken into account the possibility of changes in your circumstances?
5. Who is eligible for a debt consolidation loan?
Generally, to be eligible for a debt consolidation loan, you must be over 18, have a regular income, a reasonable credit score, and a debt amount within the lender’s acceptable range.
Australian Lending Centre does not check your credit score when assessing your application. Therefore, your financial history doesn’t matter to us, and applying will not damage your credit score further.
6. What are the pros of debt consolidation?
The primary benefits of debt consolidation loans include:
- Simplification of your monthly payments.
- Potential savings on interest costs.
- You may pay off your debt faster if you maintain or increase your monthly payment amount on the new, lower-interest loan.
- A consolidation loan pays off your existing debts, so your creditors are taken off your hands.
7. Are there any risks with debt consolidation?
Yes, there are risks. If you extend the loan term to lower your monthly payments, you might end up paying more in total interest over the life of the loan.
Another important factor to consider about debt consolidation is that if you secure the loan against an asset like your home, you risk losing that asset if you default.
8. Can debt consolidation improve my credit score?
It has the potential to improve your credit score if it leads to more consistent on-time payments and a reduction in your credit utilisation ratio. However, your score might dip initially when you take out the new loan.
9. What types of debts can be consolidated?
Most unsecured debts, such as credit card debts, personal loans, and medical bills, can be consolidated. Some secured debts may also be eligible, but this varies by lender and type of debt.
10. How do I choose the best debt consolidation loan?
Look for loans with the lowest possible interest rate and fees, and consider the loan term that best fits your financial goals.
It’s also important to read the fine print and understand all the terms and conditions before committing. Like with any loan, learn about debt consolidation and whether it’s right for you before applying.
11. Is a debt consolidation loan a good way to get out of debt?
Debt Consolidation can be an effective tool if used responsibly.
It creates a clear, manageable plan to re-organise and reduce your debt. However, it’s not a magic solution because you’ll still need to pay off the consolidated loan.
It’s also crucial to avoid taking on new debt while paying off a consolidation loan. Doing so increases the amount of debt that will need paying off, can complicate your finances, and could damage your credit score.
12. How can I apply for a debt consolidation loan?
You can apply through various financial institutions, including banks, credit unions, and online lenders. It’s wise to shop around and compare offers to find the best terms for your situation.
While many lenders require extensive documentation and a credit check, the Australian Lending Centre requires minimal documentation and does not check your credit report. We simply require proof of income, a list of your debts, and bank statements.
Remember, while debt consolidation can be a helpful step towards managing and paying off debt, it’s important to consider your own financial situation carefully and consult with a financial advisor if needed. Ensure you know enough about debt consolidation to ensure your consolidation strategy aligns with your financial goals and circumstances.
