TV and radio are aggressively marketing debt consolidation and other “get out of debt quick” schemes to vulnerable consumers.
The advertisements use lines such as:
- “Reduce your debts in minutes”
- “Halve your debts”
- “Consolidate your debts into easy monthly payments”
But before you make any decision about debt consolidation, you should get a professional service such as Revive to review your financial future and explore all the options.
What is debt consolidation?
Debt consolidation is where all of your debts are consolidated into one, and you make monthly payments towards the overall debt.
It can be done by:
- obtaining a loan
- making an informal agreement with your creditors
- setting up a formal debt agreement.
The most common way to consolidate debts is with a formal debt agreement administered under the Bankruptcy Act. This is a legally binding agreement between you and your creditors that lets you repay your debt at a reduced rate over an agreed period of time. (For more information, check out our debt agreement page.)
Debt Consolidation Risks
As we said, most debt consolidation solutions are formal debt agreements. And these are often a great way to solve your financial problems. However, formal debt agreements come with risks that aren’t always explained. For example:
- Debt agreements are not the same as debt consolidation loans. They’re actually a form of Bankruptcy, administered under Part 9 of the Bankruptcy Act.
- Debt agreements appear on your credit rating and are recorded on the National Personal Insolvency Index. That means they’ll affect your credit rating just as bankruptcy does.
- In some circumstances, you’ll be paying back your debts for a long time. And if the debt agreement period is excessive, you may even have to pay large fees.
This is why it pays to review all of your options. And a free consultation with one of Revive’s specialist consultants will let you choose the best way to free yourself from debt.
What is a debt consolidation loan?
Another option is to take out a new loan to cover a number of smaller loans or debts with higher interest rates (known as a debt consolidation loan). Depending on the interest rate and fees, it can be a great way to not only reduce the amount you pay in interest but also make the repayments (which will now be a single repayment) easier to manage.
However, if you’re looking into this type of debt consolidation then chances are your financial position isn’t a good one. And that means the interest and fees charges will probably be quite substantial. The lender may even want to obtain a mortgage over your property.
4 things to look out for when taking out a debt consolidation loan
- It should have a lower interest rate and fees than what you’re paying on the debts you’re consolidating. Paying higher interest means you’re losing money and making your problem worse.
- Some debt consolidation loans require a mortgage over your home. This will turn a previously unsecured debt (such as credit card debts) into a secured debt (using an asset such as your home as security). If things go wrong, and you default on your new loan, the lender could sell your house.
- Beware of long-term loans. Even with a lower interest rate, paying off a short-term debt (such as a credit card or personal loan) over a long-term means you’ll pay more in interest and fees in the long run.
- If you’re not careful, debt consolidation can get you into more debt. With your credit card balances transferred to your home loan, you might be tempted to put new debt onto your credit cards. This will increase your overall level of debt, and make your financial problems even worse.
For more information on personal insolvency, check out our personal insolvency page here.