Is debt consolidation right for you? 5 factors to consider
Juggling multiple debts can be stressful. One solution is debt consolidation, which lets you roll your debts into one. That way, you make just one monthly repayment – plus, you might find a lower interest rate.
But before consolidating your debts there are several factors to consider. Here are five to keep in mind.
1. Will you pay less overall?
Consolidating your debt often helps reduce your interest costs and fees, so that you pay less overall – especially if you’re finding it hard to keep up with multiple repayments and are getting stung with late fees.
To figure out if debt consolidation will help you save, calculate how much you’d repay on the consolidated debt over its entire term – and compare this with the total you’d repay on your current debts. Be sure to account for all costs, including the interest rate(s), loan period and all fees.
2. Are there penalties for repaying your current debts early?
Some debts come with early repayment penalties (aka early exit fees). These enable the lender to earn some of the interest they might have earned, had you not repaid the loan early. However, even when these are included, it might still be more affordable to consolidate in the long run.
Plus, they don’t apply to all debts (MONEYME doesn’t charge any early repayment fees for example).
3. Which other costs and fees should you be aware of?
Costs and fees vary from loan to loan. Before applying for debt consolidation, make sure you understand:
- The interest rate;
- Application fees;
- Establishment fees;
- Ongoing management fees;
- Late payment fees; and
- Any other fees.
The good news is, if you consolidate, you’ll pay fees on one loan only (instead of many).
4. Will your debt consolidation loan be secured or unsecured?
A secured loan requires you to provide an asset, such as your car or property, as collateral.
But most debt consolidation loans, including MONEYME’s, are unsecured. This means you don’t have to put any assets towards it.
5. What are the alternatives to debt consolidation?
The alternatives available depend on the nature and number of your current loans.
Perhaps you only have a credit card, but the interest is higher than you would like? If you know you won’t be able to pay it off anytime soon, you could consider refinancing your credit card balance to a personal loan.
A personal loan typically comes with a lower interest rate than a credit card and can help you save on interest costs, which in turn can help you get debt free faster. A personal loan is repaid in regular instalments that can be matched to your pay cycle.
Some personal loans come with no early repayment fees (aka early exit fees), such as MONEYME’s, which means you can pay off your loan faster if you like.
If your debt is less than what’s in your savings account you could consider using your savings to pay off your debt, provided a couple of things are true. Firstly, that you are paying more in interest on your debt than you’re earning from your savings. Secondly, that you’re not dipping into your emergency fund, which is always good to keep as a financial safety net for the unexpected.
The big decision
After working through these five factors, you might decide that debt consolidation is the right move – especially if you’re keen to streamline your finances, better control your credit and save money.