How to use Debt consolidation programs effectively

Get essential information on debt consolidation programs and valuable tips on how to make the most out of them.

Many Australians consider using one of the debt consolidation programs available to them, but these consumers do not know exactly how the programs work and how they should be used for achieving the best results.

In most cases, the debt consolidation program comes in the form of a large loan. This loan is used for the repayment of the various smaller debts which the person has. As a result, the borrower ends up with a single regular payment to make. It is typically smaller than the total size of the previous payments. As a result, the risk of default is lower. Savings can be generated as well.

When is Debt consolidation a solution?

If you have to manage the repayment of several different loans, then the use of a debt consolidation program can be highly beneficial. You will make just a single payment on a regular basis and this will help you to save on transaction costs. The risk of you missing the payment accidently will be reduced to the very possible minimum.

You can expect your debt consolidation loan to have a longer repayment term. This will result in smaller regular payments. In turn, you will have larger disposable income left to spend. This will give you room to breathe and lower your risk of default and of getting into more debt in the future.

If you have considerable credit card debt, you will certainly find a debt consolidation program to be useful. Generally, it is fairly easy to spend more than you can afford to pay back with credit cards. Besides, they have some of the highest interest rates among credit facilities. With a debt consolidation loan, you will be able to pay back what you owe on your credit cards at a lower interest rate and save money. You can opt for an unsecured loan with lower rate or for a secured one. The secured loans have some of the lowest rates around but they carry a higher risk for the borrower.

What to consider before consolidating your debt

You need to understand that a debt consolidation program will not leave you completely debt-free. You will still have to repay the consolidation loan. Even though the regular payments are smaller, you have to prepare a strict budget and stick to it in a disciplined way.

It is not difficult for people who use a debt consolidation program to slip into the debt trap once again. In this situation, they have credit cards with zero balance and this can get them into spending more than they can afford to pay back. If major new credit card debt has to be paid along with the debt consolidation loan, things can really get out of control.

You need to evaluate carefully the total cost of the debt consolidation loan. These loans typically have longer repayment terms so that the size of the regular payments is kept small. As a result, interest is charged for a longer period of time and this may make them more expensive. In a difficult situation, you may agree to incur a higher cost in order to make the repayment of debt comfortable. As your situation improves with time, you can pay off the loan sooner to save on interest. In general, it is possible for the interest rate on the new loan to be so low that even a longer term will lead to savings. You should use a calculator to determine the total cost of the consolidation loan and how much money it will save you, if any.

Each debt consolidation program carries a certain risk which you have to evaluate in advance. The risk is higher with a secured debt consolidation loan. Usually, the loan is secured with the property of the borrower. This results in a much lower interest rate and potential tax savings. However, in case of default on the repayment of the secured loan, the lender will have the right to repossess the borrower's house. The risk is considerable to it has to be assessed carefully, especially given that with an unsecured loan, the lender will not have the right to take over your property directly.

How to choose a Debt consolidation program

You can select from a wide range of programs offered by different debt consolidation lenders. Follow the steps outlined below to make the right choice for you.

Talk to lenders that you have established a relationship with first. These include past lenders and banks and credit unions which you have accounts with. These financial institutions are more likely to give you a fair and favourable deal.

Try banks that you do not have existing accounts or loans

They may present attractive offers in order to win you as a customer.

Check out the Peer-to-peer loan options

Such loans are suitable for people with bad credit history who are looking to consolidate small amounts of debt.

Go through the offers for debt consolidation which you have received in your mail box and email box. If a lender has already approached you, you will have higher chances of securing a good deal with them. This, however, does not mean that you should go for the first offer which you come across. You need to research the lender and to assess the program carefully.

Perform an online search to identify favourable debt consolidation programs. Just be careful as you may come across scams. You should try to find genuine user reviews for evaluating different programs.

Finally, you have to ensure that your credit record is good when you apply for a debt consolidation program. This will give you better chances of approval and of getting lower interest rate.