If you’re looking to get a debt consolidation loan to manage your debt, there are a number of important factors to consider before committing to any loan. For starters, you will need to take a hard look at your entire financial picture, and not just the debt. To do that, you need to ask yourself some tough questions, and be painfully honest, at least with yourself if no one else (though, you will also need to be honest with debt counsellors too).
1. How much money do you take home, after taxes and everything else has been taken out? This is your total take home pay, or net income as bankers and finance managers will call it.
2. What are your total monthly bills for credit payments ad such? This is your credit debt. You should also make note of the total cost to pay off each of these debts, as anyone reviewing a debt consolidation loan will want to see this information.
3. What are your monthly interest payments in total for these debts? You’ll want to know this; because it’s important to know the total interest you’re going to need to pay to clear your debts. If you’ll end up paying more with a debt consolidation loan, then a loan is often not a good idea.
4. What are your total monthly expenses for everything else? This includes things like food, transportation, your mobile phone payment, utilities, and any other payments you may have that are necessary for living. These are your living expenses.
5. What if any savings or investments do you have? This is important, because many times people have money saved, or a retirement account, but those accounts almost never earn more interest than their debt interest. In other words, even though you are technically saving money, you still lose it on the debt interest, so it is a net loss. That means your savings can actually be costing you money.
The next thing you’ll want to do is talk to an independent debt counsellor. Even if you think you know all of the options, laws change regularly and there are sometimes special considerations that may make you eligible for a loan scheme you weren’t even aware of.
Just make sure that the counsellor you speak with isn’t affiliated with any loan companies, or that if they are, they are insured and can be held liable for any advice they give that later creates problems. Our preference is someone who isn’t affiliated with lenders though, as advisors like that aren’t getting a kickback for recommending a lender. After speaking with your debt counsellor, you’ll be in a better position to consider and evaluate loans, which the counsellor should also have been assisting you with.
Once you’ve done all of that, you’ll need to take a little time to think it all through. Remember that if you’ve got money saved, unless it’s your emergency fund, in almost every case you’re better off to put your savings towards paying down debt. You’ll earn far less interest on savings than what you’re paying in interest fees to creditors, which is just like throwing money in a hole at the end of the day.
As we mentioned earlier, make sure you have a very clear picture of your total debt and total interest debt. For example, if you owe £20,000 spread across various loans and credit cards, and your total interest on those loans is about £500 a month, over three years, then you’re paying £18,000 in interest on it all. That’s a monster of an interest payment. A debt consolidation loan that was five years and only had an interest payment of £250 a month would save you £3,000 in interest payments. It would also lower your monthly payments. In this case, it would be a good idea.
If you had the same offer, and it was paid over 6 years, you would end up paying the same interest as if you never risked your home with a debt consolidation loan. In this case, you would need to consider whether or not the extra money you would save every month in payments would help stabilise your finances and get you back on your feet. However, if it were a 7-year loan, you’d end up paying back an extra £3,000 of interest, which would in most cases make it a bad deal for you.
Keep in mind that there are other options for dealing with debt, so it isn’t like your only choice is to get a debt consolidation loan. Rather, it’s an option, and often a pretty good one. Just consider it as one of several financial tools in your toolbox, and only use it if needed. In most cases it’s a big hammer. Sometimes a little wrench will do the job, without risking your home in the process.
You can also always get help from the government too. While they aren’t going to give you a loan, and they aren’t going to hold your hand through the whole process, they do offer a wealth of sound financial advice and tips. Like us, however, their main recommendation will always be that you first start off with a debt counsellor. Think of it like taking your car to the mechanic, rather than nosing about the motor yourself. A bit of good advice can go a long ways towards diagnosing and properly troubleshooting even the worst financial problem.