How to use a cash loan for debt consolidation
Managing debt effectively is a vital step in achieving financial freedom. However, it can be tricky, particularly if you have multiple loans to manage. If you’re struggling to keep up with your current loans, debt consolidation may be worth considering.
A cash loan to pay off existing debt will simplify your repayments and can get you on the right financial track faster. Debt consolidation is about making life easier. You combine all your existing debt into a single, manageable loan with one single interest rate. You can make one monthly or fortnightly payment to one lender at a fixed interest rate. You can also spread the repayments over a longer period.
A cash loan can be used to pay back car payments, hire purchase loans, credit card payments, and buy now pay later loans, for example.
Benefits of consolidating debt
Firstly, you’ll have a single payment to make. With multiple debts around your neck, it can be difficult to prioritise which ones to pay off first. With a cash loan, you’ll no longer have to deal with the stress and confusion of trying to keep track of multiple loans. You can organise and streamline your repayments.
Secondly, by combining all of your debts into one loan, you’ll have a lower overall interest rate across all your debt.
Most importantly, you will always know exactly how much your repayments will be, so you can better plan and manage your finances. You’ll be able to stay on top of your money more easily and avoid missed payments. Having a defined target to pay off means you can focus on becoming debt-free faster.
Is a debt consolidation loan a smart move for you?
To determine whether taking out a cash loan is a good plan there are some key things to consider. You need to think about things such as the interest rate, fees, and repayment terms. For example, you need to check the contract and read the fine print to make sure you’re clear on the costs involved in taking out a cash loan. Are there fixed fees to set up the loan and how much are they? Also, will you have to pay discharge fees? When you pay off your existing debts with your cash loan, will the companies or banks you already owe money to charge a discharge or early repayment fee?
The goal of consolidating debt is to make it more affordable. A consolidation debt is only a good move if the interest rate on the cash loan is lower than the combined interest rate on all your existing debts. Therefore, you need to calculate the total you owe and work out which debt will be the best to consolidate.
Types of debt
Bundling or consolidating some types of debt may not be helpful or may end up costing you more in the long run. For example, if you have a student loan that is currently not fully interest-bearing, it is not a good deal to incorporate that into your debt consolidation loan.
Length of repayment
You need to look at the time factor and do the maths. For example, if you combine car payments, and credit card debt together to pay off at a lower rate but over a longer period will it end up costing you more in interest overall?
Making cash loans work
Overall, debt consolidation can be a smart move if you do it right and that means paying debt back as fast as you can. Making the minimum payments on your cash loan will normally only cover the interest you owe. You won’t get out of debt if you only pay this amount. You need to increase your payments to as much as you can afford so you’ll reduce your debt faster and therefore pay less in interest.
To determine if you’re a good candidate for debt consolidation, you’ll need to have a clear understanding of your financial situation. This includes knowing how much money you make each week, as well as the details of all of your current debts, including the interest.
Once you have this information, you can begin to explore your options for a cash loan. When you apply, the lender will ask you for details of your current financial position. You’ll need to provide bank statements and a current budget that shows where all your money is going.
It’s important to remember that debt consolidation is not a one-size-fits-all solution. You need to carefully consider your options and choose the option that best fits you and your financial situation.
A consolidation loan may help you get out of debt if:
- it has a lower interest rate than the debts you are putting together
- you pay a lower monthly payment than all your other debts put together and you put the extra money toward paying down your debt faster.
Debt consolidation stops making sense if:
- it costs more in interest in the long run
- you only have only a small amount of debt that can be paid off in a short amount of time
- you’re not committed to staying out of debt and not spending more after paying off the debt.
Controlling your debt
The purpose of a cash loan is to tidy up all your personal debt and take control of it. It’s about making a change in spending patterns. It is not about creating more debt by spending the available credit you free up.
To avoid future financial trouble, it is a great idea to get in the habit of tracking your spending by making a budget and sticking to it. You’ll be able to see where your money is going and put a stop to any bad habits before they creep in.
It may also be an idea to speak to a financial expert. They’ll be able to tell you how to best manage your money, so you don’t end up in more debt. You could talk to the Citizens Advice Bureau, go to sorted.org.nz or moneytalks.co.nz for advice or support.