Taking control of your debt with a personal loan

For most of us, debt is just a part of life. Paying for a holiday, relocation costs when moving house, or an unexpected emergency with a credit card might seem like no big deal at the time, but a lot of small debts can soon add up.

Keeping track of the different interest rates and payment dates on multiple credit cards can be confusing, and any late fees or other penalties from a missed payment might add to your overall debt.

If you only make the minimum payments each month, the total interest you end up paying could be as much as the original purchase.

How to take control of your finances

If managing several smaller debts becomes overwhelming, one solution might be to take out a personal loan to cover the total debt that is weighing you down.

Personal loans often have lower interest rates than many standard credit cards, meaning that you could pay less interest over the life of the loan.

By consolidating several debts into one personal loan, you’ll only have to manage one payment every month, potentially making your budget much easier to manage. And unlike credit cards, you can usually choose the term of your loan so you know exactly how many payments you will have to make before the debt is repaid.

Types of personal loans

In general, there are two options when it comes to personal loans; secured and unsecured.

Secured Personal Loan

A secured personal loan uses an asset you already own – like a car – as security on your loan.

Because they aren’t as much of a risk, secured personal loans often have a lower interest rate, which could lower your monthly repayments and help you pay off the loan in a shorter amount of time.

However, if you can’t pay the loan for some reason, the lender can take possession of your car – or other security – and sell it to cover the outstanding amount.

Unsecured Personal Loan

An unsecured personal loan doesn’t require you to secure an asset against the loan. Because of this, you might not be able to borrow as much and the interest rate could be higher. But because there is no need to validate the asset you’re using as security, an unsecured personal loan usually has an easier approval process. This means you could receive your funds much earlier than with a secured personal loan.

Taking the first step towards debt consolidation

When considering a personal loan, the first thing you need to calculate is how much debt you want to consolidate.

Check the balance of each credit card so that you know exactly how much you owe, including fees and minimum repayments still outstanding. If any of your purchases are currently on an interest free period, consider whether it’s beneficial to consolidate now or at later time.

The market is very competitive, and while it might be easier to secure a personal loan from your existing financial institution, it’s always a good idea to shop around for the best deal.

Before you decide which personal loan is best for you, always read the fine print. Does your new personal loan have any new charges?

If you want to make additional payments, will you be charged additional fees? In case of emergency, does your new personal loan have a redraw facility?

Once you have your loan

To avoid additional fees, always make your repayments on time. If you schedule an automatic monthly payment from your nominated account, make sure you have enough money available.

If your financial institution doesn’t charge you for paying off the loan early, make extra repayments whenever you can. Even two or three extra repayments each year over a five year loan could save you a significant amount of money.

Life has a way of throwing curveballs every now and then. While you might consider yourself to be a good budgeter, always make sure you have a contingency plan in place in case things don’t go the way you expect.

And if you’re finding it hard to keep up with your repayments, you can always reach out. Your financial institution will have procedures to help you manage your debt. If you aren’t happy with their response or need additional advice, you can also contact the National Debt Helpline.

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What you need to know about taking out a personal loan