So what is a debt consolidation loan?

Should you consider applying for one?

Sometimes, the best way to explain something is through example. We have provided a short case study to show exactly what a debt consolidation loan is, and how you might benefit from one.

Consider the case of Carol…

Carol is a 25 year-old retail assistant with $2,500.00 in credit card debt. The debt is spread over three different cards, and each card has a different interest rate and payment date.

• Card 1 has an interest rate of 15% per year, to be paid on the 1st of each month.
• Card 2 has an interest rate of 12% per year, to be paid fortnightly.
• Card 3 has an interest rate of 18% per year, to be paid on the 19th of each month.

In her current situation, Carol is paying an average of 15% interest per year. The amount owing on her debt keeps going up, and she is having a hard time just making the minimum repayments. A debt consolidation loan could be an ideal solution for her.

As its name suggests, a debt consolidation loan consolidates all individual debts into a single amount, with a single regular repayment, over a single time period. Typically, consolidation loans have a much lower interest rate than credit cards or pay-day loans. They can also be repaid slowly (typically over several years), which removes the stress of rapidly-rising interest.

So Carol gets fed up, and applies for a debt consolidation loan with Debt Mediators Australia. She now has a single loan worth $2,500 instead of three separate debts. Carol has 3 years to pay it off, at an interest rate of only 9% per year. Her monthly repayment are less than half of what they were previously, and she’s actually managing to save money for the first time in years. She plans to put the savings towards buying a house one day.

If your personal situation is at all similar to Carol’s, you too could benefit from a debt consolidation loan. Click the debt consolidation tab for more information.

I want to make it clear that there are “good debts” and “bad debts”. A “good debt” is a debt for an asset that appreciates (goes up) in value; a “bad debt” is every other debt. Home loans, margin lending loans are “good debt.”  Car loans, holiday loans, using your credit card for day to day purchases are all “bad debts.”

These days, having bad debts has been normalised. “Everyone owes a little bit of money on their credit card.”  In fact Australians owe over $43 Billion on their private credit cards. How did that happen? Well, contrary to what the media is saying it’s not “extravagant living.” They’re not guzzling champagne on overseas holidays. In fact, most people get there by spending 2-3% more than they can afford to year after year. Before you know it there’s $10,000.00 on your credit cards and you’re in trouble. So what do you do? Debt Consolidation?

Debt Consolidation is now talked about like it’s the responsible thing to do if you’ve got a lot of debt. Like getting organised, going to the doctor regularly or getting your car serviced. In reality it’s more like getting open heart surgery. You’ll avoid death, have a slight improvement in your quality of life and feel the effects for years to come. Many people associate debt consolidation with debt reduction, but all debt consolidation does is package multiple debts into one big debt!

In fact, debt consolidation can be one of the biggest mistakes people make. If they’re consolidating debt into their home loan, they’re turning short term debts into long term debts and they will pay back thousands more in interest. Debt consolidation with a personal loan will be paid back over 7 years. Debt consolidation with a home loan will be repaid over 30 years! Sadly, the only thing that will get you out of debt quicker is paying more!

The sad fact about debt consolidation is that in our experience in about 80% of cases people will be in a worse situation just a few years later. Debt consolidation doesn’t change peoples spending habits. Most people continue to spend 2-3 percent more than they can afford to, and they will continue to use the credit cards they put in the debt consolidation loan. We see dozens of cases a week where the client has a debt consolidation loan and has maxed out their credit cards again.

Debt Consolidation isn’t a miracle cure that many people expect it to be.