Being in debt from time to time is a fact of life for most people. Whether purchasing a home, car, or planning a vacation, borrowing at least some of the money is essential and scheduled repayments are the norm. However, it’s no secret that some people are not careful with their money, and the tendency to borrow too much or pile up credit card debt can soon lead to an out of control debt spiral. Desperation for some respite can lead to further bad decisions that only increase the woes. At this point, expert guidance is essential and a debt consolidation personal loan could be the answer.
Debt consolidation involves rolling over your various forms of debt into one personal loan. Advantages include a lower interest rate and the capacity for paying off a regulated amount without juggling the needs of several lending institutions at one time.
In any case, the debt remains with you until it is paid off, and there really is no hiding from it. The time it takes to pay off your debt will probably be longer than the time it took to accumulate the debt, so it will require determination, persistence and patience to achieve your goal of becoming debt free.
Also, as with any other form of lending, there will be fees involved. If you are considering consolidating your debts into a personal loan it’s important to understand the actual cost of repayments, including any fees.
A Secured Personal Loan
If you have assets such as a house or car, they can be used as security for the loan. Your provider will take these assets into consideration, and possibly offer you a lower personal loan interest rate, as there is less risk to the provider if there is a loan repayment default. In the event of a default or inability to repay the personal loan, your assets can be legally seized by the lender.
In other words, you will need to make an accurate application with your chosen lender to make certain you are not under financial pressure to pay off the personal loan. It could be a good idea to have repayments automatically deducted from your pay or bank account to guarantee they are made on schedule.
An Unsecured Personal Loan
In this scenario, you won’t have any assets to protect the lender, and your personal loan will incur a higher interest rate. Nevertheless, the same rule of thumb applies, and you need to ensure that repayments are affordable and ongoing for the duration of the loan.
It’s a good idea to compare various lending institutions to make sure you get the best possible deal. A dollar saved is a dollar earned and a step closer to becoming financially solvent.
As with other types of loans, there are several ways of making repayments. The most popular methods are Variable Interest Rates and Fixed Interest Rates.
Variable interest rates are affected by decisions made by the Reserve Bank of Australia. Changes to the Reserve Bank cash rate filters down to the banks and their customers. The advantage of taking out a variable rate is the option to make additional repayments on the personal loan without incurring any additional fees. On the downside, the nature of variable means that your interest rate can go up or down at any time, and repayments could become unsustainable if finances are tight.
Fixed interest rates provide you with confidence in knowing that your repayments will remain steady for the entire duration of the loan. The downside is that fixed interest rates are generally higher than the prevailing variable rate at the time of taking out a loan.
Additional repayments on top of your scheduled repayments may also not be allowed with a fixed rate, or will incur a fee. Extra charges in the case of early termination or a change of loan agreement are also the norm for a fixed interest rate loan.
Applying for a personal loan
You will be required to provide evidence of you financial status to your chosen lender in order to take out a debt consolidation personal loan. Several factors will be taken into consideration before approval is given. These include:
- Proof of income such as a payslip, letter from employer, or tax documents
- Ongoing rent or home loan repayment information
- Financial statements and transactions
- A list of present and ongoing expenses, including all information relevant to the proposed debt consolidation
Prior to taking out a debt consolidation personal loan, it’s a good idea to take advantage of financial advisory services to make sure everything is clear. Knowledge is a powerful tool, and the information provided will assist you in securing the best possible deal with your chosen financial institution.