Debt consolidation means taking out a loan to pay off your other loans, keeping them under one account. By keeping all your debt in one place, consolidation could help reduce your owing amount and grow your credit history in future.
But in making this adjustment, hidden fees can quickly pile on — so make sure you carefully consider everything first.
Is debt consolidation right for me?
Deciding to consolidate debt is a personal choice, so there's never a wrong answer. However, if you're good with repaying loans, you might want to leave a couple of credit accounts open. That's because having a good track record of payments helps grow your credit score, which is essential to get offered the best deals. But be warned — having more credit accounts open can also be risky, as missing payments on multiple loans can hurt your credit score. You can read more about the subject in one of our other blogs.
But, at a basic level, credit scores are what lenders use to see if you're a safe bet when it comes to lending. The higher the score, the more likely you'll get approved for loans and creditors for lower interest rates.
But what if I'm not so good with repayments?
In that case, debt consolidation could be better for you.
What about leaving open credit accounts to help my score?
Having multiple accounts open is only good if you can meet repayments. If you can't, then opening accounts may bring your score down.
You won't have as many open accounts to worry about with a debt consolidation loan. You can save on repayments, usually with a lower standard interest over a longer time. This makes payments easier to manage per instalment.
The other side of this is that the interest will keep getting added on if you extend your loan out too long. After all, that's what interest is — additional money you have to pay for having 'borrowed' a more significant sum of money. It all comes down to what's important to you personally — would you like to be making smaller payments per month to meet your debt, or would you instead save in the long term?
Interest payments are also not guaranteed to be smaller with debt consolidation. If you've got a bad credit score, you could end up paying higher interest, depending on your credit provider. Debt consolidation works best when you can take the average or lowest interest rate from one account to apply to others.
There are several loans and credit payment types that you can switch to with your debt consolidation. Personal loans are typically fixed term, over a few years, with lower interest. If you can get on one of these, you could pay the same low interest across all your debt.
Another way is to do a credit card balance transfer, so all your debt lives on one card. However, repayments are based on the overall balance on the card and not the fixed loan. So, while it's nice to have everything on one card, it will depend on how much you owe.
If I lower my debt amount, could I repay my loan faster?
How much you eventually pay will come down to how big your loan is and what rate you can afford to make payments.
But having a debt consolidation loan does make things simpler. You're paying back into one loan with one set interest rate, which could potentially save you lots in the long run.
How do I get a debt consolidation loan?
Talk to your credit provider, lender or bank about switching to one. Make sure you get a quote first — you'll want to know all the details of your repayment plan upfront, including length of time, repayment rate and interest.
Some sites have unique debt consolidation calculators, so play around on them first before you get set on anything.
What about hidden fees?
If you're moving money into a new account, you may pay transfer fees. On the other hand, some lenders will offer a special transfer deal for a set amount of time, so you can find savings when setting up debt consolidation.
Debt consolidation means fitting all your loans and credit payments under one payment sum. It can help you grow your credit score and save money if you struggle to meet expenses and want to pay one fixed amount. The trick is to figure out what rate your debt consolidation is being produced at so you can avoid high levels of interest.