Long Term Behaviours
As corny as it may sound, and as cliched, debt consolidation is really about your long term financial habits. If you pay off all your debt only to start building it up again, a debt consolidation loan wasn’t worth it, regardless of whether or not you got a better deal than your individual credit providers.
If you don’t change your habits, all a debt consolidation loan served to give you is another way to spend your money, while feeling a bit better about excusing your spending because you’re "managing it" with a debt consolidation loan.
And to be fair, you may be great at managing your money. Debt consolidation loans can be absolutely appropriate for people with multiple rotating credit cards. For example, you may be great at paying off on time and at more than the minimum repayment and it’s just starting to get a bit unwieldy to remember when to pay off each.
You will - if you haven’t already - need to do hard work around understanding where your current spending habits are causing trouble and if they are, and how to manage them into a new budget that will give you the room to pay off your debt consolidation loan and create new financial habits or build old ones up.
One of the simplest ways to get started with this is to track your spending over your standard pay cycle, often fortnightly or monthly. Once you’ve done that, sit down and add up everything you’ve spent, where it went and whether or not it was a "want" or a "need." Then as ruthlessly as possible using the end result of that review as a basis for your new budget, taking into account quarterly and annual expenses like regular holidays, gift purchases, doctors appointments and utilities, among others.
Debt consolidation is for more people than just those swimming in debt. It’s a way to reduce human error by reducing the number of repayments, (hopefully) getting a better interest rate and reducing the amount of time it takes to repay your debt.
The biggest benefit that all gives is breathing room. When done right, debt consolidation gives you a bit more space in your brain (and your budget) to start building new financial habits and more closely monitoring what you spend and when you spend it. A debt consolidation loan, generally, gives you the room for a few slips into old habits as you adjust to your new financial plan without punishing you as much as your old individual debt providers may have.
If you’re planning on changing - or have already started changing - your financial habits and need a bit of breathing room to manage the transition, and a bit of grace, debt consolidation most often makes sense.
Unsecured versus Secured Risk
One of the most common alternatives to debt consolidation in many people’s minds is refinancing their home or taking a home equity loan to take into consideration the debt. From a purely at-a-glance perspective, it seems like a better deal - it’s a much lower interest rate than your credit cards!
While not a major consideration, a consideration nonetheless with refinancing is that you may, in fact, accrue much more interest on the debt that you would if you paid it out over a shorter period of time (which may negate the lower interest rate) because home loans are over 20-30 year periods, rather than 2, 3, or 5, which most personal loan terms are.
More than the interest, a bigger risk is this: if you’re having trouble paying back that debt already, by rolling unsecured debt (credit cards, etc.) into secured debt (your mortgage), you’re effectively putting your home at risk, as if you are unable to pay back those unsecured debts, your home is collateral and can be claimed by the loan holder as payment for that outstanding debt in lieu of money.
If your debts remain unsecured through a debt consolidation loan or other unsecured alternative, if you default or fail to pay those cards, they could go to collections or court, but your home shouldn’t be directly at risk.
Payment Amounts & Interest Rates
If you’re looking into debt consolidation because things are starting to get difficult at a repayment level, or if you’re looking into debt consolidation because you’d like to make your debt a bit easier to manage at a financial level, you will need to do some maths to confirm that debt consolidation is the right step to take.
You do want to make sure you’re still getting a good deal, and are, in fact, choosing a debt consolidation product that will allow you to pay off your debt sooner and accrue less interest than you would if you managed your debt by paying it all off without one, through any number of repayment strategies.
If you’re starting to get concerned with repayments or interest rates, individual credit providers sometimes have solutions they can offer or options they can extend. Before making the move to rolling your debts into one, it’s worth speaking to credit providers to see if there’s an individual arrangement they can offer you to help manage your debt if it’s a particular debt that’s causing issue.
So if what you’re paying off with each credit provider is the realistic amount, you should do the maths - assuming you no longer use the credit cards once you start paying them off. If the amount you’re paying now is what’s causing trouble, do the maths with a repayment amount you think is possible within your budget.
Look at the repayment amount, the interest rate, and include monthly interest for each individual credit provider. How long would it take you to pay it all off at your current (or realistic) rate? Once you have all that down, see how it compares to a debt consolidation loan, and how much better off you’ll be one way or the other.
If after looking at these factors among others, doing your research and taking a look at multiple quotes from credit providers (though multiple quotes may negatively affect your credit score - here at SocietyOne we will only ding your credit file if you officially start an application, some will affect your credit score at the quote level) as well as considering your future financial position, you decide a debt consolidation loan is the right fit for you, you may be well on the way to a brighter financial future.