More and more Australian citizens struggle with paying their bills or having enough extra cash to save.

When the debt collectors are on your case and you don’t know which way to turn or how you are ever going to climb out from under all your debt then debt consolidation may be the answer that you have been searching for.

When your debt becomes unmanageable and you have sleepless nights because you have so many bills and not enough cash to settle them this can be a very scary situation and you may not know where to turn to next. Debt consolidation will help you better manage your debt.

What exactly is debt consolidation?

Debt consolidation is the act of rolling all your existing bills and debt into one manageable loan. Most people try to pay their bills on time but because of issues out of their control or financial factors, they are unable to honour their debt and end up missing payments on some bills.

The problem is as soon as you skip a payment, you are usually charged extra penalty fees and charges so you struggle even more to settle your debt. When you have been charged extra through penalties then even the minimum payment is no longer enough and that’s how people get behind on their bills.

How does debt consolidation work?

In order to help you get back on top of your finances, your existing debt will be consolidated into one easy to manage loan. We will negotiate a settlement for each account on your behalf and then pay it off for you in full so you are no longer in debt. Once we have settled all your accounts we will give you a loan to the value of that amount.

This will save you money as you no longer have to worry about paying multiple accounts or missing payments and having penalty fees added. You will only need to make one smaller repayment fee on your loan monthly and won’t have to worry about keeping multiple creditors happy. You will also be charged a more favourable interest rate on your new loan agreement.

Benefits of debt consolidation include:

  • Pay off your debt sooner
  • Save money on interest fees and late penalty charges
  • Manage your debt better so that you can start having enough money to start saving

Although there are many advantages to consolidating your debt there are a few things to consider before you decide if this solution is right for you or not.

Things to think about before applying for a debt consolidation loan

There are positive and negative aspects of everything and debt consolidation is no different. To determine if debt consolidation is the correct option for you. There is no point in consolidating your debt if you are going to have problems repaying your new loan and although your original debt will be paid, this will only be a short-term solution if you are unable to manage your debt correctly.

Before you consider a debt consolidation loan there are a number of things to consider

  • Talk to your creditors about making a payment plan with easier to manage repayment options
  • Consider switching your home loan to an option that has lower interest fees
  • Transfer your credit card balance so that you have some breathing room when it comes to repaying your debt
  • If you are struggling to make mortgage repayments you should consider selling your home. It would be more beneficial to sell your house on your own terms rather than having the creditor sell it to recover their fees and you ending up with nothing

The disadvantages of debt consolidation

The biggest disadvantage of debt consolidation is that you can push yourself even further into debt. The moment that you have access to credit once again you might be tempted to spend above your means.

Other disadvantages include:

  • If you use a secured loan to secure your re-consolidation loan you could be at risk of losing your home completely.
  • It is always a good idea to first speak to a financial counsellor to find out exactly where you stand and if this solution will work for you.

Read the fine print in your loan contract

Read the fine print in your loan contract very carefully and make sure that you compare the interest rate and extra charges. Some loan companies will charge you penalties for paying off your loan early or add extra hidden fees.

Check the loan terms

Be very careful of the loan terms especially longer-term loans. Even if the interest rate is lower paying off a short-term loan over a very low term will end up costing you even more on the interest rate and fees.

Secured debt consolidation loans

A secured debt consolidation loan allows a homeowner to use their property as equity and use this to re-consolidate their debt into one easy to manage loan.

A homeowner can lend up to 85% value and use this as security on the consolidation home loan. The main risk with this type of loan is that if you default on payments you could end up losing your home and being even worse off than before.