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Debt Consolidation Loans

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Debt Consolidation Loans

In the situation that you are dealing with several debts, there’s the available option of adding them together to form a single personal loan.

For this reason, taking debt consolidation loans is an easier way of controlling your repayments. However, you need to be careful in doing this, so that it doesn’t become more expensive for you when you consider the number of interest and fees. 

Debt Consolidation Loans


What is a debt consolidation loan?

Debt consolidation works for you to add the part of the total debts that you are currently owing and at times this may include the amount of debt you have in your bad credit credit card and also it could be any other type of loan, then combine them to form one personal loan. In general, the aim is the simple manageability of every ongoing repayment.

With debt consolidation, it means you are taking out one personal loan with a lesser interest rate below the loan that you are currently owing. Due to this, you are helping in reducing the amount of the debt as a whole.

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Is It A Good Idea To Take Debt Consolidation Loans


For a debt consolidation loan, there are many different benefits, among them are the following;  

  • Making one basic repayment makes it easy to manage your debt. 
  • Saving on your loan interest and fees when you get a personal loan that has a lesser interest rate than the debts that you owe currently.
  • You will have to repay personal loans for a fixed period, which has an open timeline of being free of debts, that is if you can repay your loan and also the extra fees within the required time.   

Nevertheless, the loan could be costlier than your current debts, such that you will add up more debts with the interest and fees. You must compare the rates and fees of the new loan you want to get with the existing debts. Also, look out for the new loan terms and calculate the making you will be repaying the loan throughout its existence.   

So, for the length of the loan terms, it is going to determine the number of your regular payments, but if your loan terms are longer you would be paying a lesser amount of repayment generally. 

If it is difficult for you to manage the repayment on your credit card, you may also reach out to a lender or credit card issuer to know the available options. Also, you may seek the advice of a financial counselor who offers free and confidential professional ad

Compare Debt Consolidation Loans


Often, it is a nice idea for you to compare consolidating your debts before you choose one because the cost of each would vary based on the loan provider. So that you can know the cost IAFC, has analyzed the interest rate and fees for the regular personal loans which are unsecured with a 5-star rating in comparison with the IAFC average database;  

  5-Star Rated product average Database average Difference
Interest rate 7.56% 11.82% 4.26%
Upfront fee* $121 $207 $86
Ongoing annual fee* $5 $33 $

 

The calculations on the average of these interest rates involve using the middle points of the range of the rates where you see applicable. The average overall cost involves the total amount of interest that is paid in addition to all fees where applicable. You may have to pay this separately not as part of the balance of your loan.  The average fees calculation is centered on the products that it is applied to even for those not charging any fee. 

So like it is shown above, on a personal loan there is a lower average interest rate attached to the personal loan with 5-Star ratings. Some of these lenders would charge initially even the current fees which are lesser on average.  

How To Be Eligible For A Personal Loan


Getting access to the most appropriate terms for the loan you are getting from a lender, could be related to your credit score and some extra financial situation. Take for instance you have a low credit score, you would probably find lenders that would charge you higher for an interest rate compared to the people who have a good credit score. So, if you have a score that is not up to what you would want, you need to take some steps to add to it. 

So, if you want to compare the different personal loans, check out the table below to see the loans selected by different providers that we have in our database who provide unsecured personal loans that are things that need you to provide your asset for security.  So before you apply, check out with the loan provider to confirm if you can use the loan to consolidate your debts.  

How does taking a debt consolidation loan compare to have a credit card?


When you are checking out the difference between repaying your several debts on credit cards or taking a significant personal loan. For instance, most individuals repay the minimum amount on credit card debts so that they don’t pay the fees for late-payments on credit cards. So this can mean that they continue to pay interest on the amount remaining, while not being able to cover much down payment of the money they are owing.    

You can compare this with a personal loan because the repayments required would be enough to cover the loan amount including the interest with a fixed date for repaying the overall debt by remaining consistent with the payments regularly.  

The IAFC research team brought some assumable examples to indicate the cost differs depending on the average figure in the database that we have. So this example shows that you are repaying two credit cards. Firstly, there is a credit card with a low rate which has an outstanding amount of 10,000 dollars, also an 11.9% interest rate including a yearly fee of 46 dollars. The second credit card has an outstanding amount of 5,000 dollars having a 19.80% including a yearly fee of 183 dollars.  

Therefore, if you decide to do the least 2% repayment or higher fees of 20 dollars for both of the cards, then you would have this repayment structure;   

Credit cards – $15,000 balance split across two cards
  Low rate Rewards
Amount owing $10,000 $5,000
Interest rate 11.99% 19.80%
Annual fee $46 $183
Minimum repayment $202 $102
Time to repay 24 years, 7 months 43 years, 10 months
Total interest $9,202 $18,358
Total fees $1,104 $7,869
Total interest and fees $10,306 $26,227

 

The annual fee cards with the low rate depending on the average yearly fee for a card that is non-rewards for unsecured personal loans in the IAFC database. The yearly fee is also separate from the balance on the credit cards. The least repayment is about 20 dollars or 2 percent depending on the higher one for the reward cards and lesser rate.  So the least you can repay on your credit card will continue to decrease as long as you don’t buy anything using your credit cards again.  

For this example, you may choose to consolidate the debt of 15, 000 dollars that you have on your credit card into the same amount of an unsecured personal loan. So below we have checked your repayment if you get to repay the rated 5-star personal loan for three years. Keep in mind that to qualify for these loans, you require a good credit score.   

5-Star Rated personal loan – $15,000 paid off over 3 years
Interest rate 7.56%
Upfront fee $121
Ongoing annual fee $5
Monthly repayment $467
Total interest $1,812
Total interest & upfront fee $1,933
Total interest & upfront & ongoing fees $1,948

 

Calculating the average rate on the interest involves using the range of the rate where it applies.   The average overall cost involves the total amount of interest that is paid in addition to all fees where applicable. You may have to pay this separately not as part of the balance of your loan.  The average fees calculation is centered on the products that it is applied to even for those not charging any fee. 

You must ensure you can easily repay the new amount for your debt consolidation loan. With the given example above, the monthly repayments would increase for the short term loan if you compare this to both credit cards. You can reduce your repayment when you choose a personal loan that has a longer loan term although you need to calculate your total interest amount and the fees included for the time that the loan exists then you compare with the debts that you are currently owing. 

Supposing you can pay your loan back monthly, you can save a substantial amount from your interest and fees. You will also clear your debt within a certain time.  

How Can Debt consolidation Loans affect my credit score?


Generally, taking a debt consolidation loan should not affect an individual’s credit score above any other form of payday loan alternative.  As a result, applying for credit whether it is a credit card or personal loan will be identified as a credit inquiry on your credit report.  If within a short period, you have made several loan applications, it could affect your credit score negatively which will make it more difficult for you to get credit later.  

Also, if you fail to meet your loan repayments, it will be recorded on your credit report which will give you a lesser credit score. Contrary to this, in case you can make the repayment within time, and show that you have a good history of paying back your debts, this can increase your credit score.

For this reason, carefully work out your financial stance before you take this form of loan also check again to confirm if the loan will meet your need. 

If it is difficult for you to manage several debts, check out your credit score and see if you need financial help. Reach out to when by calling the National debt helpline on  1800 007 007 and talk to a financial counselor for free!