If you have a number of debts and are struggling to keep up with the required payments, debt consolidation may provide you with the relief you deserve.
We’re going to take a look at debt consolidation in detail by examining the three types of debt consolidation options available and helping you determine which, if any, would be most suitable for you.
Whether you’ve missed a payment on a credit commitment or simply feel that you debt has gotten out of hand or you’re being crushed under the pressure of repayments, interest and fees, debt consolidation can help you save while relieving the pressure.
What is debt consolidation?
Debt consolidation is simply taking all of your existing debts, which may include personal loans and credit card debt and, rolling them into one larger loan or consolidating multiple credit cards by using a balance transfer credit card.
What kind of debts can we consolidate?
- Payday loans and short-term loans
- Personal loans
- Vehicle loans
- Credit card balances
- Bills and retail accounts
3 ways you can consolidate your debts
- Through the use of balance transfer credit cards
- Through the use of home equity and remortgaging
- By using a debt consolidation loan
A warning about debt consolidation
Debt consolidation is not a one size fits all solution and may make your debt situation worse. If you do not keep up with your new repayments and do not change your spending habits, your home or any security you’ve offered up will be repossessed.
As if that’s not enough, you may actually end up paying more for your debt overall, especially if you enter into a loan agreement blindly and do not compare your options carefully. If you are unsure as to what would be the most suitable option to help you reduce how much you’re paying towards debt or are struggling to manage multiple debts, consider seeking free advice from a counsellor.
#1) Consolidate with a balance transfer credit card
There are hundreds of balance transfer credit cards in Australia; some offer 0% interest for a shorter period of 6 months while others offer a longer 0% interest period of up to 26 months.
Balance transfer credit cards let you transfer the balance and balances off of credit cards onto the balance transfer credit card. You then have the 0% interest free period to repay your debts without having to worry about interest being added on.
Is using a balance credit card right for you?
If you have one or more credit card debts that fall within the minimum and maximum transfer limits of the balance transfer credit card you’re looking at and you have calculated that you will be able to repay the full balance before the 0% interest expires.
You should also be committed to remaining debt free as well as ensure you do not use your credit card to make purchases. This is because the purchase rate will be quite high and any payments you make on the credit card will be used to pay this debt as opposed to the transferred balance.
When the use of a balance transfer card is not right for you
If your combined credit card debts exceed the maximum allowable transfer amount for the balance credit card, this debt consolidation method is not right for you. In addition, if your debts are small or they do not add up to the minimum transferable amount required then using a balance transfer credit card is also not a good option.
#2) Consolidating debt using home equity
If you’re a home owner you may be able to use the equity in your home to consolidate your debts. This is a particularly a good option for those that have an excessive amount of debt and they’re starting to struggle with having enough money for basic living costs. If you have credit card debts, a car loan, retail accounts and other short-term or personal loans, consolidating these by refinancing your home loan is your best option.
You must understand that although the interest you’re being charged on your home loan is lower than the interest on all of your other debts, you will, most likely, be charged more overall for your debts due to the longer loan term. This is why it is absolutely necessary for you to do the calculations and consider all of your options before refinancing.
It is common practice for people these days to try to repay their mortgages down faster to save thousands in interest overall and adding debt to your home loan will have the exact opposite effect and make your debts and home loan more expensive overall.
That being said, lowering your total debt repayments by up to 60% of what you’re currently paying will free up a lot of money and allow you to stop borrowing money to simply cover your basic living costs.
#3) Using a debt consolidation loan
When people think of debt consolidation, this usually what comes to mind; taking out a personal loan to repay existing debts. Few people are aware of the other two debt consolidation options which we’ve already discussed and, if neither of those is right for you, this may be your best bet.
You do need to exercise caution when opting for a debt consolidation loan as you may find that your situation will actually worsen. This is especially true when your overall required payments are lowered only by a small amount and your loan comes with a long term and a relatively high interest rate.
Most Australian banks and alternative lenders offer debt consolidation loans and you will generally have to meet all their strict requirements to qualify.
You will have to provide the debt settlement figures for all of the loans you wish to consolidate and will be given a interest rate that will match your credit rating.
You can also obtain a debt consolidation loan from a peer to peer lender which are very likely to offer one of the most, if not the most competitive interest rate on the market.
Using a debt consolidation loan when you are not committed to clearing debt or when you will take out further credit will simply make your situation worse. Always take your time and examine all of your options before making a decision and applying for a loan to consolidate debt.
Alternatives to consolidating your debt using traditional methods
You may be able stay clear of debt consolidation and, with effort and commitment, create a debt repayment plan that will help you clear your debts as they are. A debt repayment plan is similar to a budget but is specifically geared towards managing and increasing debt repayments to clear debt in the cheapest way possible.
In addition to analysing your debts and working out a repayment plan, you will have to contact your creditors and try to negotiate better rates or more favourable terms as well as consider using a balance transfer credit card and refinancing credit to get better rates and lower fees. Of course, this “self-help” solution is not for everyone as it will require a great deal of discipline and commitment.
Remember that if you are unsure about which debt consolidation option is best for you, there are many free resources and organisations that can provide you with free, impartial advice on how to best handle your debt situation.