Debt consolidation involves taking out one large debt to pay out several other, smaller debts, which are then closed.
Most people associate debt consolidation with unsecured personal loans – like credit card debts, payday loans and overdue bills. The problem is that these can have very high interest rates, which means you can end up paying double or even triple the original sum. Unsecured debt consolidation loans are a good solution. They have low interest and the convenience of regular repayments on a single debt during a set time-frame.
Helen has three separate credit card debts totalling $9,000. Each card carries a different interest rate, and each repayment is due at a different time. This makes it very difficult for her to keep track of her finances and make repayments on time. On average, she’s charged 19% per year, and she’s already paid more than the value of the original debt. Deciding enough is enough, Helen applies for a debt consolidation loan. She uses the money from the loan to pay off her credit card debt. Helen now has a loan for $9,000 over 7 years, with an interest rate of 15.45% per year. Her monthly repayment has only gone down $4 but at least she knows when she’ll be debt-free.
|Credit card 1||$3,000||$60||19.00%|
|Credit card 2||$2,000||$40||17.00%|
|Credit card 3||$4,000||$80||21.00%|
Helen’s story is a good example of the benefits and disadvantages of debt consolidation. On the upside, she now only has to make one repayment a month and she’ll be debt-free in a set time period.
She was surprised, though, that her repayments didn’t decrease by much at all, and that it would take her 7 years to repay her debt. Most people expect repayments to be lower and the time-frame to be shorter. She also learned that debt consolidation loans can carry fees and charges.
Debt consolidation is just one option in a range of debt solutions. For an overview on the range of options available, take a look here. You must determine whether the information is appropriate in terms of your particular circumstances.
New Leaf isn’t a lender, so we don’t provide debt consolidation loans. Instead, we’re experts in finding the right debt solutions for people who are experiencing difficulty with their debts.
Want to talk about debt agreements or other solutions? Talk to us, and we’ll talk you through your options.