What You Need to Know About Debt Consolidation and Refinancing

 Managing multiple debts is one of the most stressful things ever. It can feel overwhelming at times and you may find it difficult to keep track of all of them. If you’re struggling to pay off your debts, then it might be a good idea to consolidate them into a single loan. Debt consolidation (or refinancing) is the act of combining multiple loans into one loan. A new loan is taken out to pay off unsecured debts like consumer debts and other liabilities to effectively reduce your monthly payments and in some cases, lower your interest rate as well.

But debt consolidation is not for everyone. If you’re not careful with your finances, you may end up getting deeper into debt and spend more credit than what’s necessary. To ensure you don’t mortgage your future, you have to understand what debt consolidation is all about. Here’s everything you need to know about debt consolidation and how you can approach it with full confidence.

Steer clear from companies that make unrealistic promises

Debt consolidation loans are issued by credit unions, banks, and financial institutions. When you receive a debt consolidation loan, the lending company either uses the funds to pay off your combined debts or deposits the funds to your bank account to which you will use for your monthly payments.

While most companies out there are truly looking out for their clients, not everyone shares the same sentiment. If a lending company proposes an offer that’s too good to be true, do not negotiate with them at all costs. Chances are they’re operating illegally and your information and bank accounts may be put at risk. Don’t trust companies that:

  • Ask you to sign blank documents
  • Does not have the proper accreditation
  • Rushes you with the transaction
  • Does not discuss the payments
  • Does not put the interest rate and loan costs in writing

Check if you’re paying less than your current loans

It’s a good idea to compare the new loan’s interest rate as well as other fees and costs to your existing loan. This can help you determine whether or not you can afford the monthly payments of consolidated debt. If the new loan turns out to be expensive, it may not be worth the time and effort to consolidate them. Do keep an eye out for other costs such as:

  • Penalties for early payment of original loans
  • Stamp duty costs, value fees, application fees, etc.

While you may be tempted to switch to a loan with longer terms due to lower interest rates, you may end up paying more in interest and fees. You can lower your interest rate by consolidating unsecured debts like credit cards and personal loans into a single secured debt. For secured debts, this means putting up your property or car as security. This means that if you’re unable to pay off the new loan, the secured debt you put up may be at risk of getting taken by the lender and sell them to recoup the money you loaned.

Consider other options first before consolidating your debt

Before reaching out to a debt consolidation company, it’s worth evaluating your options first to see if you can manage your debt without loaning. Here are some examples:

  1. Talk to your mortgage provider

If you’re struggling to make payments, you can talk to your mortgage provider and see if you can renegotiate your payment terms. All lenders have programs to help you manage your debt called hardship variation to make your repayments more affordable. This can include pausing your payments for a while or reduce your loan terms depending on what’s agreed upon.

  1. Try credit counselling

Credit counselling is exactly that: provide guidance to clients who are struggling with their debts. A reputable credit counselling organisation can help you develop a meaningful budget along with a personalised plan to solve your financial problems. Initial counselling sessions typically last an hour with succeeding sessions lasting no more than that.

  1. Paying the monthly balance

This is a less complicated way of relieving your debt since all you need to do is pay off the minimum payment requirement. In order for this to work, you have to be disciplined and aim to pay more than that amount or else it’ll take a long time before you see a debt-free horizon. You may want to take a look at your budget plan and see if your funds are enough to cover the minimum payment requirements and consider paying high-interest debts with higher amounts (if possible).

  1. Get free professional advice

You can obtain professional advice from community legal centres and legal aid offices regarding debt consolidation and refinancing. You can also contact a debt advisory company to help you decide which course of action to take, especially if you’re facing legal consequences.

Debt consolidation is one of the many ways of debt refinancing that can ease your financial burden and help you get back on track. If approached the right way, you’ll have a better chance of securing your future and hopefully, become debt-free over time. Contact a debt advice and solutions company in Melbourne to learn more about your refinancing options and choose one that best fits your specific needs.

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