Everything You Need to Know About Debt Consolidation

What is debt consolidation?

Debt consolidation is the process of combining a number of different debts into one single loan that has an overall lower interest rate. It works well in a situation where you have multiple credit cards or unsecured loans, and can save you money in interest payments. By taking out a new personal loan to repay other debts, you can get a fresh term loan with a lower interest rate.

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Why do people consolidate their debt?

There are a number of reasons why people consolidate their debt, including:

• Simplify your monthly repayment schedule. Owing money to a number of different lenders can be overwhelming. If you are trying to pay off multiple debts at the same time, these will have varying interest rates and repayment dates, which can be confusing and hard to stay on top of. Consolidating the debts into one loan will mean there is just one repayment date and one interest charge, making it easier for you to keep track of your commitments.

• Lower your interest rate. Taking out a new personal loan to cover your current debts will mean you obtain a lower interest rate on one loan, rather than varying interest rates from numerous sources.

• Know when your debt will get paid off. Having a number of loans and credit cards with varying end dates can make you feel like you’ll never get out of debt. A new fixed term loan will mean you will know when the debt will be paid, making it easier for you to plan out your finances.

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What types of debt can be consolidated?

There are a variety of different types of debt that can be consolidated, including:

• Credit card debts
• Medical bills
• Car loans
• Personal loans
• Unsecured personal loans
• Utility bills

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Benefits & drawbacks of consolidation

While the benefits of debt consolidation are many, it is also good to keep in mind possible drawbacks in order to make an informed decision that works for you. Check out some of the main advantages and disadvantages of consolidating your debt below:

What to consider before consolidating

• Is this the best option for me right now? Taking out a debt consolidation loan is a decision that shouldn’t be taken lightly, and should offer you more benefits than the loans you currently have. 

• Will this loan save me money? Make sure the debt consolidation loan you are taking out offers a lower interest rate, and check all fees and charges associated with it.

• What are the fees and charges on this loan? Don’t get caught out with high fees and charges from lenders. Loans available to those with bad credit often carry higher rates and fees, so be cautious. 

• Read the small print! Ensure that you know exactly what you are getting into. Ask questions, read all of the necessary paperwork and understand what it means for you if you are declaring bankruptcy.
  

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What methods can be used to consolidate debt?

• Credit card balance transfers. Transferring your credit card balance from one credit card to a new credit card offers an easy way to consolidate debt and lower repayments, although there are some risks to be aware of.

• Home equity loans. Home equity loans can give you the money you need to pay off your current debts, and secure you a reasonable interest rate on the loan depending on the amount of equity in your home.

• Debt consolidation personal loans. This is a popular way to pay off debts with one scheduled monthly payment. SocietyOne offers tailored loans specifically for the purpose of consolidating debt.

• Home refinancing. Refinancing your home can save you money on your mortgage if done right.

• Debt settlement. Hire a debt settlement company that can help you negotiate your debt and create manageable monthly payments.

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Steps to take to consolidate your debt

• Create an inventory of your debts. Write a list of all of your outgoings so you can visualise your debt, how much you owe and to whom.

• Review your loan options. Do some research on what loans are available and compare debt consolidation loans.

• Calculate repayments and interest. Work out exactly how much you will owe each month and have a sound understanding of what the contract means for you.

• Apply for your chosen loan. Put in an application for the loan you want, and wait to hear if your application has been accepted. Your lender will then help you come to an agreement that is manageable for you.

• Understand your payment schedule. Ensure you have a good grip on when your payments are due. Missing payments will incur charges and lead to additional debt.

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Tips for getting the most out of consolidating

Between now and your debt settlement date, create some easy savings goals with quarterly checkpoints. These smaller, more attainable goals will give you confidence in your money management and help you feel accomplished every time you hit them.

• Track your spending. Take a snapshot of your outgoings. Seeing your income stacked against your expenses will help you to spot the holes in your pockets. Cut back where you can and save.

• Share your goals. Tell your friends and family about your plans and goals. Not only will this help them understand what you’re facing and respond supportively, but knowing others are aware of your intentions can help cement your own belief in your actions.

• Get creative with your social calendar. Think of some enjoyable alternatives to an expensive night out, without compromising on the fun, such as game nights, taking turns to host a dinner at home or some DIY activities. 

• Track your progress. Stay motivated by tracking your progress, and give yourself a little reward here and there.

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