So, How Does Debt Consolidation Work?
In today’s world, it can be tempting and sometimes even necessary to apply for credit. Credit cards make this temptation even greater with offers that could be considered too good to be true. More often than not they may attract you with an initial ‘teaser’ rate which may look low at the start, but can then sting you with a much higher rate after an introductory period. Ooft.
When consumers take out several lines of credit with different providers, it often doesn’t take long to start getting bogged down with monthly repayments. In fact, this may be the time for them to consider doing something about debt consolidation. If you’re in this position, you might be wondering...what is debt consolidation? How does it work? And what should you know about the process?
In short, debt consolidation is a way to:
- roll a number of different debts into one “catch all” solution,
- try and achieve a low interest rate, lower monthly payments or better payoff terms,
- deal with monthly cash flow issues.
Why consolidate your debt?
It’s important to understand exactly what debt consolidation is and how it works. Keep in mind that it doesn’t change or relieve the original debt – it simply transfers separate individual debts to a single credit facility, potentially making it more manageable. Keep in mind that another loan may not always be the right answer. If you’re struggling with multiple separate payments or simply can’t afford to repay anything, then you may want to seek some additional support through free financial counselling services such as the National Debt Helpline, or speaking directly with the creditor, to see what options are available may help.
It is also a good idea to look for everyday ways to help you pay down your debt faster, like using Wisr App to help pay down your debt in the background.
To make debt consolidation worthwhile, you’ll want to ensure you get better terms in one way or another. This may mean a lower rate of interest, a reduced monthly payment or an extended period to make repayments.
Can you save money by consolidating your debt?
Imagine if you had half a dozen or more credit cards, each with a high interest rate and a significant balance. In this case, each of those credit card companies would require (at the very least) a minimum payment each month. Now if you were to transfer all of those balances into one consolidated loan, with a more reasonable interest rate, but continue to apply the same total monthly repayment, then you might be able to repay the total outstanding debt more quickly, thus saving you on the total interest you’ll need to repay.
How do you know if you’re eligible?
Firstly, it’s a good idea to make sure you know where you currently stand with your credit history. The best way to do this is to obtain a free credit report from the major credit reporting bureaus such as Equifax, Illion and Experian. Wisr also provides a free service for customers to check their credit scores through WisrCredit. Once you understand your current position, then it’s about working out which Lender works best for your situation, a Broker may be able to help with that as well, or you can check if you’re eligible for a Wisr debt consolidation loan by getting a free rate estimate here.
Keep in mind..
If you have a number of different debts with various lenders, ideally, you should look to pay off the debt with the highest rate of interest first (this is known as the Avalanche Method) but once you have done that, move the payment that you would have paid to this first company onto another debt.
Remember, some companies will offer you markedly lower interest rates and/or a lower monthly payment but may extend the overall number of payments. However, this may take some of the pressure off your monthly obligations and may be a better solution for you.
Does debt consolidation affect credit scores?
A lot goes into working out your credit score, which includes applications for new credit, and your repayment conduct on your existing or new credit facilities. The most important thing to keep in mind is to ensure you manage your debt levels and stay under control, by meeting all your minimum repayments. If you have multiple different payments which may be attracting high interest rates, consolidating all your debts into a single payment, with favourable terms may be a good option to consider.