If you struggle to manage your debts, paying someone to roll them all into one consolidated loan may sound like a good idea. Here are the things to check before consolidating or refinancing your debts and how you can get free help.
What is Debt Consolidation?
Debt consolidation involves rolling all your existing debts into one loan. This may help you better manage your repayments, but it may also worsen your situation if the interest rate or fees in the new loan are higher than they were with your original debts.
Avoid refinancers who make unrealistic promises about getting you out of debt or advertise that they can help you no matter how much you owe.
Things to Consider Before You Refinance Your Debts
Taking out a debt consolidation loan can be helpful if it means you will pay less in fees and interest. But, it may only be a short-term arrangement if you can’t meet the repayments on your new loan.
Before you refinance or pay a company to help you with your debts, there are some things you should do.
Talk to Your Credit Provider
Ask your lender if they can change your repayments or extend your loan.
Consider Switching Home Loans
A different home loan could save you interest and fees, but you must ensure it is a better deal.
Get a Credit Card Balance Transfer
If you research your options, a balance transfer deal can be a good way to get on top of your debts – but it can create more financial stress.
Consider Selling Your Home
You may be better off selling your home if you struggle with mortgage repayments, as it is better to sell on your terms than for the lender to sell it as a mortgagee sale.
What can go wrong with debt consolidation?
Refinancing could be risky if you are not careful. Here are some things that can go wrong.
Getting deeper into debt
If you get access to more credit through your consolidated loan, you might be tempted to spend more.
Losing your home
If you turn all your unsecured debts (like credit cards) into a secured debt (like your home loan), you could lose your home if you don’t pay the new debts.
Do not trust a financial institution or a firm that :
- asks you to sign blank documents
- refuses to discuss repayments
- rushes the transaction
- won’t put all loan costs and the interest rate in writing before you sign up, or
- arranges a business loan when you only need a basic consumer loan.
Seek Help to Manage Your Debt
Free help is available to help you get back on track with your finances.
A financial consultant or an advisor can help you sort your money and negotiate debts with creditors.
Complain to an Ombudsman
If you have tried negotiating with your credit provider and think they are unfair, you can complain to an external dispute resolution scheme or ombudsman. While the ombudsman is processing your complaint, the lender cannot start or continue legal action. But, if court judgment has already been handed down, it is too late to approach an ombudsman.
Seek legal advice on your debts from legal help centers and Legal Aid offices in your city and state.
Conclusion: Important to Check Debt Consolidation Checklist
You should do some things before signing any debt consolidation loan contracts.
Compare the interest rate, fees, and charges.
Make sure you will pay less for your new loan by comparing the interest rate, including fees and other costs, against your original loan. Some lenders charge penalties if you pay off loans early, and some charge application and legal fees, valuation, and stamp duty if the new loan is secured against a home or other assets.
Check the Terms
Beware of longer loan terms. Even if the interest rate is lower on the new loan, paying off a short-term debt (like a credit card or personal loan) over a very long term means you will still pay more interest and fees.
Make sure you explore other options before paying someone to consolidate or refinance your loans.