With interest rates and the cost of living rising, many Australians are searching for ways they can save money each month – but there’s one way you may not have thought of.
Debt consolidation involves bringing your existing debts together into one new loan. The objective is to reduce the number of individual payments you make and reduce the interest rate you are paying on your more expensive debts.
Who should consider debt consolidation?
Debt consolidation may be something to consider if you are:
- Paying a very high interest rate on your debts – for example a credit card, cash advance debts or store credit purchases.
- Managing multiple debt repayments and struggling to keep track of what is due and when.
- Getting into a credit trap where all of your spare income is used to pay interest, but you don’t have enough left over to reduce your debt balances.
What does debt consolidation look like?
There are several different strategies that can be used to consolidate debts, including:
- Moving debts to a new credit facility (e.g. a personal loan or mortgage) with a lower rate of interest or lower fees.
- Lengthening the time of existing loans (e.g. taking a mortgage debt back out to the 30-year loan term).
- Changing the repayment terms on an existing loan to interest only.
A combination of these strategies can also be used, depending on your circumstances.
What are the benefits of debt consolidation?
Usually, debt consolidation is implemented to make it easier for you to pay your debts, however, there are numerous other benefits, including:
- Potential cash savings – Potentially the biggest benefit of debt consolidation. By consolidating your debt into a loan charging a lower interest rate, you have the potential to save interest on monthly repayments and reduce your overall interest.
- Lower repayments – Reducing the interest rate and spreading out repayments over time could potentially reduce the monthly repayment due.
- Simplicity – One loan repayment is a lot easier to manage than juggling several repayments.
- Savings on interest and fees – Debt consolidation could potentially reduce the amount of interest you pay on high-interest facilities such as credit cards and save you money on fees for multiple credit facilities. This may make it easier to pay back your debts.
- Stress relief – Specialist lenders are available that may lend to you if you have missed repayments on your current debts, or if you have a poor credit history.
What is important to remember about debt consolidation?
It’s important to remember that a debt consolidation strategy doesn’t reduce your debt – it just makes your repayments more manageable.
A debt consolidation strategy should be implemented in combination with a change to your spending behaviour, so that you can work to reduce your overall debt level over time.
Want to chat about debt consolidation?
Give our team a call on 9095 6888