Many finance people use the term “debt consolidation” in their vocabulary on a daily basis. For those of you out there that don’t work in finance, the term itself can sound a bit overwhelming. So what does it really mean?

Well, rather than having lots of small separate loans, it’s the process of “consolidating” them (i.e joining them all into one) so you only have to worry about one repayment.

Here are four major benefits of a debt consolidation loan.

  1. Your total monthly payment amount will often reduce.
  2. You only have to worry about one payment, rather than many different ones that fall on different days.
  3. You are less likely to be charged late fees.
  4. It protects your credit rating because your risk of default is less likely.

If you are still not convinced, here is an example to help explain it further. Here is a list of debts a person may have.

  1. Credit Card: owing $2000
  2. Store Card : owing $1700
  3. Personal Loan: owing $900
  4. Store Loan : owing $300

So in total, the person above owes $4900. Now lets look at their current monthly payments they need to make.

  1. Credit Card paying $100 per month (to clear debt in 2 years)
  2. Store Card paying $98 per month
  3. Personal Loan paying $95 per month
  4. Store Loan paying $47 per month

Therefore, each month they need to pay $340 to four separate lenders.  Now lets consider just one debt consolidation loan for $4900.

  1. One Loan of $4900: The monthly payment would be $240.00 (assuming 16% interest over a term of 2 years)

As you can see, this has reduced their total monthly loan payment by $100, which is a significant saving. Plus it makes it easier to manage given there will only be one lender to deal with, as opposed to four.

Structuring the payment to coincide when your pay goes into your account, will then help you make sure you have enough funds to make the payment, and prevent any dishonour fees being charged.

By being organised with one payment, and avoiding being charged late or dishonour fees, will help protect your credit rating and allow you to deal with any lender of your choice in the future.

Are there any downsides in obtaining a debt consolidation loan?

At Fair Go Finance we are dedicated to giving you fair and unbiased information , so you can be in control of your finances and ultimately make the decision you feel is best for you.

So to answer this question, there is one downside you should consider before you proceed with a debt consolidation loan.

If you consider our earlier example, we didn’t consider how much longer each of the four separate debts had to go. For example, the store loan for $300 may have had another 12 months to go before it was going to be repaid. By consolidating it into the one debt consolidation loan meant it is now joined all together with the others and will be repaid at the end of two years.

The decision you need to make is whether the large savings in monthly payments now is worth extending out any loan terms that may expire before your new consolidated term.

Generally speaking, most people want a debt consolidation loan to reduce their monthly outgoings, so if it means their cash flow is going to be a lot easier to manage, most people consider it worth the compromise but it is a decision you need to make for your own situation.

At Fair Go Finance we have assisted many people who’ve needed to reduce their monthly outgoings, and have benefited greatly by taking out a debt consolidation loan. If you feel one would benefit you, we’re here to help!

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It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.

Check your options before you borrow:
For more information about other options for managing bills and debts, ring 1800 007 007 from anywhere in Australia to talk to a free and independent financial counsellor.

Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan.
If you are on government benefits, ask if you can receive an advance from Centrelink.

The Australian Government’s MoneySmart Website shows you how small amount loans work and suggests other options that may help you.

* This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.