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How does a debt consolidation loan work?

How does a debt consolidation loan work?

Used the right way, a debt consolidation loan may give you a blueprint to help you break free from debt sooner.

If you’ve found yourself with a couple of different debts or feel like there’s no clear pathway out of the red, a debt consolidation loan may be a way to manage this by allowing you to bring all your debts together to create a single repayment plan.

Whether a debt consolidation loan suits you really depends on your circumstances, so it’s important to know exactly how it works before starting your journey out of the red and into the black.

1. Brings all your debts together

The idea behind a debt consolidation loan is that it’s enough for you to repay all your current debts – this can be from things like credit cards, store cards or other personal loans. By consolidating all your debts into one you may be able to save on administration fees and possibly also on the interest rate. You’ll only have to make one regular repayment, which can help you manage your cash flow better.

To start, figure out exactly how much you owe across your debts so you know how big your debt consolidation loan will need to be. You can use a budget planner to calculate how much you can afford to repay.

Don’t stretch yourself too thin. While it’s great to pay off your debts as fast as possible, your budget needs to be realistic so that you can stick to it.

2. Outlines a repayment schedule

Consolidating your debts reduces the number of repayments you have to make and can give you a clear schedule of repayments. With a CommBank personal loan you can choose the frequency for which you make repayments – weekly, fortnightly or monthly – so that it matches your pay schedule. Setting your repayments so that they’re due soon after you’re paid can help reduce any temptation to spend that money elsewhere.

3. Puts an end point in sight

Having one loan for a set period of time, rather than multiple loans with multiple timeframes, means you’ll have a clear end date for your repayments. This can be a good motivator to pay off the debts.

With our personal loan repayments calculator you can figure out roughly how long the life of a CommBank loan would be, given how much you need to borrow and how much you can afford to repay.

Things to think about

If you’re feeling overwhelmed by your debts, the last thing you want to do is increase them. So before you take out a debt consolidation loan, it’s important to be certain you’ve stopped spending more than you earn. If you haven’t, another loan may only become a bigger burden.

It’s also important to remember that no two loans are the same. Ideally you’ll be paying less in interest by taking out a debt consolidation loan. If you’re not, ask yourself whether the benefits of only having one debt are worth any extra cost. Be honest when assessing the situation – this will give you the greatest chance of success.

If you need more help with getting on top of your debts, you can give us a call on 13 14 31 to explore your options.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. You should consider seeking financial advice before making any decision based on this information. Applications for finance are subject to credit approval. Full terms and conditions will be included in our loan offer. Fees and charges are payable.