Compare Debt Consolidation Loans

What are Debt Consolidation Loans?

Managing multiple debts with varying interest rates and repayment schedules can be a daunting task. Often leading people to seek effective solutions for simplification and financial relief. A debt consolidation loan allows individuals to combine their debts into a single, more manageable payment. We explore the practical benefits of debt consolidation — saving money, reducing cash flow concerns, and eliminating the stress of multiple repayments.

Roll all your debts into one payment

When you consolidate your debt into a debt consolidation loan, essentially, you are getting one loan to pay off all your debts. You move all loans into one easy to manage payment schedule.

For example, consider someone named Chris, who is paying off three separate loans. The loans consist of a $10,000 credit card debt, a $5,000 personal loan, and a $4,000 personal loan. Each loan has different interest rates and different payment schedules. This means the borrower is having to make loan repayments three times per month.

Chris is having cash flow issues from having to make three repayments per month. He’s also noticed there are loans on the market with much cheaper interest rates. To reduce his interest expense and for ease of budgeting, Chris decides to roll all his debts into one. The end result is a debt consolidation loan of $19,000 (the balance of the three loans), with one monthly repayment and a lower interest rate than what he was paying. Chris saves money, reduces his cash flow concern, and also removes the stress of having to keep on top of three separate repayments each month.

Who can apply for a debt consolidation loan?

People with multiple debts seeking to lower their monthly payments often qualify for debt consolidation. Eligibility typically requires a good credit score and a stable income. Additionally, providing an asset as security, such as your home or car, is usually necessary to secure the consolidation loan.

The lending criteria will vary depending on the financial institution chosen.

What kind of debt can be consolidated?

Debt consolidation is a financial strategy that involves combining multiple debts into a single, more manageable loan. This approach can be applied to various types of debts. Providing individuals with the opportunity to simplify their financial obligations and potentially reduce overall interest rates. Here’s a more detailed breakdown of the types of debts that can typically be consolidated:

Credit Card Debt

Credit card debt is one of the most common forms of debt consolidation. High interest rates on credit cards can lead to financial strain when it’s not effectively managed, but consolidating these debts into a single loan with a lower interest rate can make repayment more feasible.

Personal Loans

Unsecured personal loans, often used for various purposes such as home improvement or debt consolidation itself, can also be consolidated. Combining multiple personal loans into a single loan with a fixed interest rate and structured repayment plan simplifies the debt management process.

Medical Bills

Medical expenses can accumulate unexpectedly, leading to financial stress. This is the last thing you need when recovering from sickness or injury. Consolidating medical bills into a single loan allows individuals to streamline payments and avoid the potential negative consequences of unpaid medical debt.

Payday Loans

Individuals facing the high interest rates associated with payday loans may find relief through debt consolidation. This process can provide a more reasonable interest rate and a longer repayment period.

Other Unsecured Debts

Various other unsecured debts, such as personal lines of credit or high interest instalment loans, may also be consolidated. This can simplify financial management and potentially reduce the overall cost of borrowing.

It’s important to note that not all debts are eligible for consolidation, and the specific options available may vary depending on individual circumstances and the lender’s requirements. While debt consolidation may offer advantages, individuals should carefully consider the terms, fees, and overall impact on their financial situation before proceeding with this approach. Seeking advice from financial professionals can help ensure that debt consolidation is the right strategy for a particular situation.

How can I determine if a debt consolidation loan is right for me?

Generally speaking, the main reasons people choose a debt consolidation loan are to lower their interest rate, to lower their fees, and to make one regular repayment instead of multiple. 

When looking at debt consolidation loans, it’s important to understand how much interest you’re paying on each loan and what the loan terms are. Consolidating into a loan that has a lower interest rate will reduce the interest expense if the loan term remains the same. However, if you are extending the loan term (the length of the repayment period), it’s possible that you could end up paying more interest (even if the new interest rate is lower) purely by extending the loan term. 

Consider these examples

For example, Loan A, a $10,000 loan with an interest rate of 10% and loan term of one year, will have a total interest expense of $550 across the life of the loan. 

Compare this to Loan B, a $10,000 loan with a lower interest rate of 5% but a longer term of 5 years. This loan will have a total interest expense of $1,323. This is almost three times the interest expense! 

The important point to note is that while Loan B ends up with a higher interest expense, the monthly repayments are $189 per month. The monthly repayments for Loan A are $879 per month. As you can see, choosing the right loan for you, really comes down to your unique needs. If you have the cash flow to pay off a loan faster, the interest expense will be lower. But if you don’t have enough spare cash each month, it might make sense for you to choose a longer loan term. 

To Summarise

• If you’re looking for a more manageable loan, with a single monthly repayment, it may be worth looking into a consolidation loan to consolidate debt. 
• You need to consider if loan terms align, are there fees to pay off a loan early and what the new consolidated loan will look like in terms of payments.
• If you want to consolidate your debts, have a look at the debt consolidation options above.