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Advantages and Disadvantages of Debt Consolidation

By Simon Cooper
June 30, 2022

What is Debt Consolidation?

Debt consolidation involves combining all or some of your existing loans, credit card balances or other debts into a single place. It is the process of using different forms of financing to pay off other debts and liabilities especially when you are saddled with different kinds of debt. One advantage of debt consolidation is that you only have to make one repayment and you would only have one set of fees to pay (if any). This may make it easier to manage your repayments. However, it’s important to compare the interest rate and fees that you’ll be charged under the new, consolidated product you are considering.

What types of debt can be consolidated?

There are different types of debt that can be consolidated, this includes:

✓ Credit card debts

✓ Loans (Car, Personal)

✓ Utility bills

Why do people consider debt consolidation?

  • Lower interest rate – If you decide to take out a new personal loan to cover your current debts, you will be able to obtain a lower interest rate on one loan instead of varying interest rates from numerous sources.
  • Simplify repayment schedule – If you are trying to pay off multiple debts at the same time, the varying interest rates and repayment schedule can be hard to stay on top of. Consolidating the debts into one loan would mean that there is just one repayment date and one interest charge, making it easier for you to keep track of your commitments.
  • Better financial planning – If you are on top of your repayment schedules, you will be prepared when making the repayments each time which would make it easier for you to plan out your finances.

The Advantages of Debt Consolidation

Debt consolidation is a great tool for people who have multiple debts with high-interest rates or monthly payments. Should you decide to avail one of these loans, you can benefit from a single monthly payment with lower interest rate rather than multiple payments.

Going through the debt consolidation process can help you look forward to becoming debt-free sooner.

  • Multiple debts into one loan – Save on fees with one consolidated loan and have one regular repayment date with lower interest rates.
  • Stay on top of payments – Avoid missing repayments that could lead to additional fees and could potentially decrease your credit score.
  • Gain credit card control – Save money through moving your credit card balance to a lower interest rate.
  • Avoid bad credit rating or bankruptcy – Stop your debt from spiralling further out of control, avoid being behind on debt payments.
  • Better budgeting – A fixed payment schedule will make it easier for you to budget your finances. You will be able to spend more time putting careful consideration into your monthly budgets.

The Disadvantages of Debt Consolidation

Consolidating debt does not guarantee that you won’t go into debt again. Although the interest rate and monthly payment may be lower on a debt consolidation loan, it’s important to pay attention to your payment schedule. There may also be up-front costs, which some debt consolidation loans come with. There’s also the potential loss of special provisions on school debt, such as interest rate discounts and other rebates.

If you have not properly planned to stay on top of everything, getting a debt consolidation loan might just set you back even further.

  • Exit fees – There is a possibility that you may be charged an early exit fee from your current loans. However, this depends on your loan provider and loan terms, that is why it is better to do your research first and try to find a loan provider that will not charge any exit fees or early repayment fees that will allow you to pay off your loan early without any penalty.
  • Taxes may apply – If you are using your home loan to consolidate your debts, Government duties and taxes may apply

Starting Your Journey To Financial Freedom With The Right Partner

Debt can be a sensitive topic to discuss. People would altogether avoid any conversation related to debt. Debt can cause feelings of shame and anxiety to manifest which can result in a few health and family related problems. However, no matter what your personal opinion is on debt, you have to remember that you don’t have to deal with it alone. If you are not comfortable with sharing your worries with family or friends, it is important to note that there are professionals that can help you with your whole debt situation should you decide to take out debt consolidation loans and repayment plans.

At Forward360, it is our mission to help you in coming up with an effective financial planning strategy that will help you in your journey towards financial freedom. Our diverse team of highly experienced financial advisors are more than willing to help you with your debt management concerns. We will collaborate in coming up with a strategy to make sure that your repayments are dealt with timely and accordingly. For a better, wealthier tomorrow, choose us today.

Simon Cooper

Co-Founder, Managing Director, Financial Adviser

Simon is a financial advisor who takes his work seriously. He ensures that all of his clients receive the best possible advice, so that they can reach and exceed their financial goals, both personally and professionally. Simon has been in the business for many years, and has a wealth of experience to share with his clients. He is known for being friendly and approachable, and always puts the needs of his clients first. Simon Cooper is an Authorised Representative of Reedy Capital Pty Ltd (AFSL No. 495539), Authorised Representative Number 1248807 and a financial adviser at Forward360.

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