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 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 consolidating your debt. Debt consolidation basically means collapsing all your existing debts into one new debt.
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 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 commit to the monthly repayments on your personal loan, you could end up hurting your credit score or in 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 enables you to honour your commitment to repayments while comfortably paying your other 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.