Consolidating your debt

You’ve overspent and now you realise your bank balance won’t cover your credit card debt. Before you plunge further into debt, it’s a good idea to act quickly and consolidate your debts into something with a comparatively lower interest rate product such as your home loan or a personal loan.

Consolidation can be done by using features of your existing home loan, like redraw or line of credit, or alternatively by refinancing the entire home loan to borrow a larger amount to cover your debts.

You might have several loans and debts like a car and personal loan, credit and store cards – and each of these will be charged at different interest rates, perhaps with account fees and other charges. Debt consolidation allows you to minimise the interest rate and fees being charged, while maintaining the same monthly payment as before. The more debts you have the more likely you are to miss a repayment, so by consolidating your debts into one payment it is far easier to manage your debt.

Find what works for you

As with any debt repayment strategy, it’s important to look at the pros and cons of debt consolidation. As you are no longer repaying numerous debts and have eliminated the debt from your credit cards, it may be tempting to slip back into bad spending habits. Unless you cancel your credit cards and stick to a tight spending budget you could end up accumulating other debts again.

The key to making debt consolidation work is to continue to pay as much as possible each month off the balance of the loan. By keeping the consolidated payment the same as the sum of the multiple payments being made previously, the debt will reduce more quickly as less interest is being made, so more of the payment is reducing the debt itself.

Here’s what else you should look out for:

• When taking out a secured debt consolidation loan you may be risking your assets (your home) if you are unable to repay your loan.
• You may have to pay exit fees to get out of existing loans early.
• The cost of a new loan (like establishment fees) must be factored into your calculations to make sure you will still be making a saving.
• If you roll your debts (like a personal loan, car loan or credit cards) into your home loan, be aware that you are potentially extending that debt to be paid out over the life of the home loan which could be 30 years, if you choose to only make the minimum repayments .

Contact By Design Financial Solutions to discuss whether a debt consolidation loan will work for you.

*This information is general in nature and does not take into consideration your individual circumstances. Please contact us for further information.