7 questions to ask about debt consolidation

If you’ve built up a few debts and feel like you’re getting nowhere fast with payments and interest charges, debt consolidation can seem like an obvious answer.

It can give you a clear picture of your weekly or monthly bills and repayments, and help you get on track with a budget. But it’s important to ask the right questions to find the debt consolidation solution to suit your needs.

Here’s our tips on seven questions to ask your bank, and yourself, about debt consolidation.

1.What’s the interest rate… now and in the future?

Debt consolidation loans are usually unsecured personal loans, so the interest rate is higher than a loan you can secure against an asset like a house or car, but much lower than a credit card. The interest rate of the debt consolidation loan is key – making the switch won't make sense unless the rate is lower than what you’re paying on the original debts.

Tip: Keep an eye on any introductory offers with a low interest rate. It may be a short-term fix, but be tough to manage after the honeymoon period is over.

2.What are the fees and charges?

As with any loan, there can be hidden fees to establish a loan, or monthly account keeping fees. Look for an option where you understand why and what you’re paying, and do the sums to make sure the savings you’ll make by rolling your debts together aren’t eaten up by new fees.

Tip: The QBANK personal loan offers no monthly fees, free online redraw, no penalties or fees for extra repayments, and an extra discount on your interest rate if you have your salary deposited directly to your QBANK account.

3.Are you closing your old debt accounts?

This is crucial to your debt consolidation getting you back on track. Some banks may cancel your old debts and loans for you, paying them out on your behalf. Others may provide you with the funds directly – so you’ll be in charge of paying off the individual debts and closing the accounts.

Temptation lies in an injection of cash into your account, with no-one to check how you use it. If you’re worried about managing the cash, talk to your bank about options for paying out debts and closing accounts. The last thing you want is to double your debt when you’re doing your best to get rid of it.

Tip: Bear in mind adding debts to a new loan extends their life, so if you have a smaller debt you’re close to paying off, think about prioritising that.

4.How are you going to repay the loan?

This is a question both you and your bank should be asking. Responsible banks and financial institutions do more than race to get your signature on a loan. They want to understand your budget, and that you have the means to make the repayments under the terms of the loan.

Don’t be too hard on yourself because you’ve accrued some debt – it’s OK to look for some flexibility on a redraw facility as part of the loan. That way, you can make extra payments but access the cash if there’s an emergency.

5.How much am I paying back?

Like any loan, your bank should be able to provide clear figures on the total you’ll pay back over the course of the loan, and how much of that is interest.

This is also a good time to ask about extra repayments. If you're getting your financial ducks in a row and want to knock down your debt, it’s good to have a choice to pay more of your loan to reduce interest. Check if there’s a penalty for extra payments or paying off the loan early. If you’re stuck with a fixed term, your savings might not be worth it.

6.How did you get here in the first place?

It’s great to be paying attention to your money and make a decision to manage it and your debts better. But don't forget it's an opportunity to look at your budget – not just how you’ll cover the debt consolidation loan repayments, but how you got there in the first place.

Take some time to reflect and look back on what you’re paying off – how much if it was expenses you could have avoided, or things you could have saved for instead of putting on credit? Be honest with yourself about your spending and saving habits, and talk to your bank about budget planning.

Tip: Automating your loan payments and household expenses is a great way to make sure your non-negotiables are paid, and take the temptation away if you find managing money a challenge.

7.Can I roll my debts into my home loan?

If you have an existing home loan, ask your bank about refinancing to roll your debts into that loan. Not only does it keep it simple to make repayments, low interest rates mean you’ll be getting a great deal.

Remember, debt consolidation seems like an obvious way to reduce debt, but it’s still debt. If your bank agrees to extend your home loan, it will likely extend the life of your loan and the interest you pay for the life of the loan.

Ready to ask the questions?

Let’s talk debt consolidation and get you and your family on track for a year of financial freedom. Talk to us on 13 77 28.

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