Debt is a facet of financial life that almost everyone experiences. For most of us, some form of debt will be carried throughout our lives. As finance can sometimes be a taboo topic of discussion, many who live with uncontrolled debt end up feeling stressed and isolated, without knowing where to turn for advice. If this sounds like you, you are definitely not alone and while it may seem inescapable, there are often easier and more effective ways to tackle your debt than you are currently employing. One such method, especially if you have multiple forms of debt, is debt consolidation.
What is Debt Consolidation?
Simply put, debt consolidation is the process of combining multiple forms of debt (such as a car loan, credit card and short-term loan) into one new loan. This new loan will have a different interest rate and different repayment terms to your other forms of debt, with the new rate/terms potentially being more beneficial to you (i.e. you may get a lower interest rate or more favourable payment terms). You then pay only towards this new debt consolidation loan, which then pays off your other debts.
Benefits of Debt Consolidation
One of the main benefits of debt consolidation is that there is only one, single debt to repay. Part of the ‘debt stress’ people experience can be attributed to having multiple debt payments weighing on you. Having one single payment makes life a lot easier and reduces your stress.
Debt consolidation can also help reduce the potential for late payments. Having multiple debts often means some get paid late, which can then affect your future ability to get loans. Having one loan to pay, especially with online or mobile banking that allows you to easily schedule payments, means the risk of late payment is greatly reduced.
One other potential benefit is that having a lower interest rate on the consolidated loan can result in increased savings for you. The money that would have otherwise gone to paying interest can now be saved.
Requirements for a Debt Consolidation Loan
Most banks and credit unions offer a debt consolidation loan but each will have their own specific requirements and guidelines. Here’s a general list of documentation to have that should cover the basics:
• 2 Forms of ID
• Job Letter
• Utility Bill
• Bank Statements for the past year
• Salary Slip
As for guidelines to increase your chances of being successful for a Debt Consolidation Loan, here are a few:
• Have good credit history – this combines a number of factors such as number of loans taken, a history of on-time loan repayment and even how timely your bills are paid.
• Have consistent cash flow – your income should occur on a consistent basis
• Your total debt should not be more than 40% of your total income
If you have any concerns or questions on the above, a good idea would be to identify a few different banks, based on reputation and your history with them, and speak with their loan officers. You can then get advice on what can be done to help you get in shape for obtaining a consolidation loan and to be on your way to managing your overall debt.