Is debt consolidation the right option for you? Read these tips to understand the pros and cons.
It's possible for the amount you already owe to escalate into uncontrollable territory over time. One way to manage your debt is to apply for a personal loan for debt consolidation. Here are some important things you should consider before applying.
What is debt consolidation?
If you’re struggling with credit card debt or have difficulty juggling payments on multiple loans – each with specific interest rates, conditions and balances – you may want to consider rolling up these debts into one easy-to-manage loan with a single monthly payment.
There are however several things you should consider before going down that route. Here are some pros and cons to help you make an informed decision.
- Paying once, instead of multiple times a month. Taking out a personal loan to pay down your credit cards as well as any interest you owe means you'll only have one repayment to make every week, fortnight or month over a fixed amount of time. Managing your debt thus becomes easier.
- Obtaining fixed rates and terms. A fixed rate and term in a personal loan can keep you disciplined in paying off debt quicker. However, you should never commit to a payment schedule that you can’t meet, or you’ll risk hurting your credit score.
- Lowering your monthly payments. Stretching the term on your personal loan means that you could be spending less towards paying off your debt on a monthly basis, although you will end up paying more overall.
As with every loan you undertake, there are certain drawbacks. Here are some of the downsides of using a personal loan for debt consolidation:
- The potential to accumulate more debt. Consolidating your debt means that you’ll free up credit. But if you’re not careful, you might end up spending more and as a result accumulating even more debt than you started with.
- Spending more overall. As mentioned above, a personal loan with a longer term can help you reduce your monthly repayments, However, a longer loan term means you’ll pay more interest and spend more overall.
- Damaging your credit score. If you don’t keep up with the monthly repayments on your personal loan, you could end up hurting your credit score or worse, be in a serious financial hardship.
What to do before applying for a personal loan to consolidate your debt
- Shop around to find one that offers an interest rate and terms and conditions that work for you.
- Take the time to calculate what is a comfortable repayment term for you, so you don’t risk paying late fees and further interest.
- Consider a repayment schedule that lets you to honour your commitment to repayments while comfortably paying your other living expenses and saving as you pay off your debt.
- Know your credit rating and serviceability. This will be useful when applying for a personal loan.
Being proactive and taking control of your debt as soon as you feel it getting out of hand can save you money and help you stay in a good position to take on other loans in future, such as a home loan.
To get you started, find out how much your repayments might be on a Pepper Money personal loan using this handy calculator, or get your individual rate before applying in just a few minutes (it won't affect your credit score).
Your top questions:
Does consolidating debt ruin your credit?While consolidating debt does not 'ruin' your credit, if you are taking out a new credit facility, your chosen lender will likely undertake a credit check, which will be recorded on your credit file. If you have recently applied for multiple lines of credit, then these all do add up on your credit file and may result in a slightly lowering score.
Can I consolidate debts with bad credit?You can still consolidate debts if you have a lower-than-average credit score, however lenders may apply a higher interest rate based on your credit score and historical ability to meet your repayments.
Got other questions? Call us on 1300 108 794. We're here to help.
This article provides you with factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. Neither Pepper nor its related bodies, nor their directors, employees or agents accept any responsibility for loss or liability which may arise from accessing or reliance on any of the information contained in this article. For information about whether a Pepper loan may be suitable for you, call Pepper on 13 73 77 or speak to an accredited Pepper Money broker.
All applications are subject to the credit provider’s credit assessment and loan eligibility criteria. Terms, conditions, fees and charges apply. Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.
©Pepper Money Limited ABN 55 094 317 665; AFSL 286655; Australian Credit Licence 286655 (“Pepper”). All rights reserved. Pepper is the servicer of home loans provided by Pepper Finance Corporation Limited ABN 51 094 317 647. Pepper Asset Finance Pty Limited ACN 165 183 317 Australian Credit Licence 458899 is the credit provider for asset finance loans.