When done correctly, debt consolidation loans can be a powerful tool for getting your finances back on track. Combining small, high-interest debts into one low-cost loan can make it easier to manage payments. But there are a few things you should consider to ensure you’re getting the best deal.
What Types Of Debts Can Be Consolidated?
Credit card balances, car loans, store cards, hire purchases, and personal loans, as well as buy-now-pay-later balances and overdue bills can all be consolidated.
Credit cards account for 51% of debt, while personal loans make up 37%, according to Canstars’ Consumer Pulse Report 2022. One-third of those surveyed are worried about their finances. And for good reason. Canstar’s research reveals that 58% spend more than they earn, and 20% live payday to payday. Not surprisingly, debt consolidation loans are in high demand, but it’s crucial to choose the right one.
What Is The Best Debt Consolidation Loan?
Not all debt consolidation loans are created equal. Finding a reputable, low-cost loan provider is vital. There are also other factors to consider when selecting a loan company.
1. Does the lender pay off your existing debt directly? Or are you expected to do this on your own?
Paying down existing loans helps improve your credit score. You also don’t want to be doubling your debt. It could be tempting to use the money for something else but this is exactly what you don’t want to do.
It takes time to pay off debts, you need to communicate with all your creditors, answer questions and fill in forms. Having the lender do this for you is easier and saves you time. Experienced lending consultants settle debts every day and can make sure the process does not overwhelm you. You don’t want to encounter any obstacles or hidden fees when paying off your loans. They can interpret the existing loan agreements for you and advocate on your behalf. If you are consolidating a car loan, it is also important for the lender to remove all previous security.
2. Will you save on loan costs?
Consolidating loans may incur additional fees like early repayment fees. But because you are hopefully paying less in interest, the savings should outweigh initial setup costs.
On average clients from online loans NZ company Loansmart saved 40% off their monthly repayments. But how much could you save? You can calculate your potential savings using debt consolidation loan calculators. Keep in mind that the interest rate you qualify for will vary depending on your personal situation.
Bonus tip: Check if your lender offers personalized interest rates, as some lenders charge the same rate for everyone.
3. How much money do you need to borrow?
Be sure the lender can provide enough funds to cover all your existing loans before applying. With unsecured debt consolidation loans there is a typical cap of $30,000, but some lenders offer loans up to $50,000 without requiring collateral. An analysis from NZ loans company Loansmart found the average size debt consolidation loan was $15,000. The smallest amount was $2,000 and the largest was $100,000.
Bonus tip: If you have a bad credit score, make sure the lender offers bad credit loans for debt consolidation. You may still be able to reduce your monthly payments even if your credit score isn’t perfect.
4. Are you required to provide asset security?
Ensure that the loan company offers both secured and unsecured loan options, since providing collateral may not be in your favor. It is possible to obtain a low-interest loan without having to mortgage the family home.
5. How long do you need to repay your loan?
When deciding how long to repay your loan, remember to strike a balance between comfort and speed. Make sure your repayment plan is affordable and you have room to save (so you won’t have to borrow more) while keeping your monthly repayments high enough to pay off your debt faster. This may require a maximum loan term of 5 years or more. Some loan companies offer unsecured loans up to 7 years, and a minimum loan term of 6 months to ensure that your repayment plan is affordable.
6. How likely are they to approve your loan?
Every credit check impacts your ratings. As does a declined application, so you are better off choosing a lender with a good history of loan approvals. Look at client reviews on Google Business Profile. You can increase your chances of getting approved for a loan the first time by researching the lending company before applying.
You can also check client reviews to make sure the lender has a good reputation and provides excellent customer service.
7. Can you make extra repayments without incurring fees?
The goal of a debt consolidation loan is to repay your loan, so it’s vital to choose a company that won’t penalize you for doing this. Always check the fine print for information on early repayment fees. A flexible repayment option, such as weekly, fortnightly, or monthly repayments, is also important when choosing a lender. Time your repayments to when you get paid, so you never miss a payment. This helps you improve your credit rating.
Taking on any type of loan is an important financial decision. A debt consolidation loan can be beneficial in three ways. 1. Reduced loan costs and fees over time, 2. More affordable loan payments, 3. An improved credit rating. But it’s vital you choose the right online loans company. Be sure to compare lenders against these seven factors to ensure you’re setting yourself up for repayment success.