If you're among the millions of Australians currently struggling with debt, you might be wondering whether debt consolidation or debt management is the better option for you. Both options can help you get your finances back on track, but it's important to understand the differences between them before making a decision.
In this blog, we're answering some of the more frequently asked questions when it comes to comparing debt consolidation to other debt management strategies.
How do debt consolidation loans work?
Debt consolidation loans can be a great way to simplify and reduce debt. Through this type of loan, you borrow a single lump sum to pay off multiple creditors at once. With fewer bills to worry about, it’s easier for you to not only stay on top of payments but also stick to your budgeting goals. Depending on the lender, you may even receive a better interest rate than before, saving you money in the long run.
Before considering such a loan, make sure that you have taken steps to get your spending under control and have a plan for meeting repayment terms timely and responsibly.
What is the downside to consolidating debt?
Consolidating debt may be a desirable option under certain circumstances, but there are potential drawbacks to consider. Some debt settlement companies will charge hidden fees and ask you to make a monthly payment that is higher than your current minimum. There is also the possibility of having your credit score affected if you miss payments or fail to pay off your loan as agreed.
Before signing up for a debt consolidation loan, it’s important to read the terms and conditions carefully so you know what responsibilities will be yours.
Also, consolidating multiple debts into one payment often means that the total amount due will be paid over an extended period. You will have to weigh whether the reduced stress and convenience of having one payment instead of many outweigh the drawback of potentially being stuck paying back your loan for several years.
What are the different types of debt consolidation?
Debt consolidation is an effective way to manage debt when you're feeling overwhelmed.
There are several methods of debt consolidation including balance transfers, personal loans, as well as home equity loans.
This debt consolidation method involves transferring your current higher-interest debts like credit card debts to a lower-interest loan, allowing you to pay off debt faster. The disadvantage of a balance transfer credit card is that it can involve balance transfer fees, not to mention the temptation to make more credit card purchases.
Personal loans can be a useful tool for consolidating multiple payments into one payment at a fixed rate and term. When you take out a personal loan, you can use the money to pay off multiple lenders.
Home equity loans
If you own a home, a home equity loan may provide an attractive way to consolidate debt by using the equity in your home to secure a low-interest loan. With repayment terms often stretched out over more years than personal loans, home equity loans are not for everyone, but can be useful in situations where paying off debt at a faster rate is not an absolute necessity.
What is the difference between debt consolidation and paying off credit cards?
Debt consolidation and paying off credit cards are two common strategies for addressing outstanding debt. Debt consolidation involves applying for a personal loan at either a bank or specialised agency and using the loan to pay off multiple smaller debts in one fell swoop.
This can be beneficial because the interest rate on the consolidated loan is often lower than those of multiple credit cards, potentially allowing for more money to be applied to actually reduce debt rather than just service fees.
Paying off credit cards, on the other hand, involves taking extra measures every month to reduce what is actually owed across several accounts - it can involve refinancing or aggressive payment schedules designed to get you closer to a zero balance as fast as possible.
While both strategies can be effective in addressing debt, the right solution for you will depend on your circumstances and goals around managing debt.
What is the difference between debt review and debt consolidation?
Debt review and debt consolidation are two different options that can help people work their way out of debt. A debt review is a process where a debt counsellor works with the debtor to analyse their financial situation. The debt counsellor then helps put together an individualised debt management plan for that person, which can include reduced interest rates, settlement agreements, and budget adjustments.
Debt consolidation is a process where all of a person's debts are combined into one loan, usually at a lower interest rate. This way, there is just one payment that needs to be made each month as opposed to multiple payments.
It's important to note that while both can be effective ways of handling repayment, they should not be confused with one another or used interchangeably - it's best to speak with an expert before deciding which option is right for you.
Is it better to consolidate debt or settle debt?
Debt settlement is a process where you negotiate with your lenders in order to reduce the total amount that you owe. This often involves negotiating a lump sum settlement and then setting up a new repayment plan for that reduced amount. It is often utilised as a last resort before declaring bankruptcy.
For people who are not yet in such dire financial straits, a debt consolidation loan is a better choice. That's because debt consolidation helps you achieve your financial goals by allowing you to pay off your debts faster and more efficiently, while also potentially saving money on interest rates.
Ultimately, the choice between debt consolidation and settlement will depend on your individual situation and goals for managing your debt. For most people, however, debt consolidation will be a better option than settlement.
Which is better debt relief or debt consolidation?
Debt relief refers to a range of different options that can help you get out of debt, including bankruptcy, credit counselling, and debt management plans.
Debt consolidation is one type of debt relief that involves rolling all your debts into a single, more manageable loan. This can be an effective way to reduce interest rates, simplify your monthly payments, and get out of debt faster.
When weighing up the pros and cons of debt relief vs debt management, it's important to consider your individual situation and goals. Both debt relief and consolidation can be effective strategies for dealing with debt, but the best option for you will depend on your unique needs and circumstances.
However, debt consolidation is generally a better choice for most people. While debt relief involves making major changes to your finances and lifestyle, debt consolidation offers a more gradual, manageable approach that can help you achieve long-term financial success.
It's not uncommon to experience difficulties with managing debt throughout different stages of life. Whether you are dealing with credit card debt, student loans, or other types of consumer debt, it's important to take a proactive and strategic approach to dealing with your debts.
A debt consolidation loan can help ease the feeling of overwhelm and simplify your repayment process, making it easier to achieve debt-free status.
At Driva, we're passionate about helping Aussies find the right loan to meet their financial needs and goals. We understand that taking out a debt consolidation loan can seem daunting, which is why we have built a network of 30+ lenders where your online application is checked against thousand of lender policies before being shared with them in order to protect your credit score. When you choose us for your loan, you can do so confidently, knowing that we provide 100% rate and fee transparency for maximum peace of mind.