When you are considering a debt consolidation loan it is important that all consider the following issues:
- interest rate
- loan establishment fees
- monthly account keeping fees
- monthly repayments
- prepare a monthly budget
- term of loan
- What loan should you select
The interest rate
The interest rate for debt consolidation loans is usually advertised as a per annum figure, for example 12% p.a. Interest is usually calculated monthly on a compound basis which means if your account is charged with additional fees and charges the interest will compound at a higher amount. Additionally if you miss payments you may be charged a default rate of interest. Make sure you enquire is the loan has a default rate of interest.
Loan establishment fees
Some financial institutions charge a loan establishment fee for a debt consolidation loan. Make sure you enquire how much the loan establishment fee is and when it is payable.
Monthly account keeping fees
Some financial institutions charge monthly account keeping fees or monthly payment processing charges for debt consolidation loans. Make sure you enquire about these fees and charges as it will effect your total debt consolidation loan repayments.
The monthly repayments?
Most debt consolidation loans are repaid monthly. Given interest is usually calculated on a compound basis and charged to your account monthly you need to ensure that you can afford the repayments. If you fall into arrears on your debt consolidation loan the lender may be entitled to charge default interest on your loan. If default interest is charged the debt consolidation loan balance will escalate significantly and the lender may call in the loan balance (ie approach the court for a judgment that it be repaid immediately.
Prepare a monthly budget?
We highly recommend that you carefully prepare a monthly budget before you apply for a debt consolidation loan to make sure that you can afford the monthly repayments. The lender who provides the debt consolidation loan will ask you to submit a budget with your debt consolidation loan application and will most likely also ask to see source documents like payslips and perhaps bank statements. The lender will need to be satisfied that you can afford the debt consolidation loan repayments.
Term of loan
We recommend that you consider a loan term (ie repayment period) of no longer than 5 years. If you cannot afford the loan repayments on a 5 year term then you may need to consider other options.
What loan should you select?
We recommend that you shop around the market for a loan with low interest rate fees, low establishment fees and low account keeping fees. Remember the combination of these fees and charges will effect the total effective interest rate and the period in which the loan will be repaid in full.
Debt Consolidation Get the Facts
4/06/10