Consolidating your debts – the advantages and disadvantages
Australian household debt has hit record rates, and Penrith is no different with most of us juggling home loans, car loans and credit cards. For some, it’s manageable. For others, though, no matter how hard they try they just can’t gain traction.
Despite chipping away at an ever-growing debt, some of our clients are exploring other options – and debt consolidation is one of them.
What is debt consolidation?
Debt consolidation is combining all your existing debts into one single, larger debt.
It’s a popular choice with borrowers who are paying off multiple high-interest loans. It eliminates the need to juggle multiple monthly payments with one singular payment, and potentially enables you to consolidate into a loan that offers more favourable terms, such as a lower interest rate.
However, there are definite pros and cons to debt consolidation, so it’s important to consider them all in the context of your financial situation.
Why debt consolidation may be of interest to youThere are several potential benefits associated with debt consolidation, and one of them is simplification of your finances. Rolling multiple payments and due dates into one monthly payment can help alleviate the stress of debt.
So many clients experience reduced anxiety and overwhelm from clearing their head of the noise and focusing on paying down a single loan.
There can also be financial benefits. After guiding you through the various loan options, a mortgage broker can negotiate a more competitive interest rate on your behalf.
The goal is to deliver long-term benefits and, if you’re able to pay down your debt in the same (or less) time than you would have been able to before consolidation, you’ll save money.
The key, though, is discipline with your payments.
When should you look to consolidate your debt?
Don’t see consolidation as a last resort – it’s an option to be considered before you get too deep in debt. If you’re struggling with juggling your payments, start to investigate the choices available to you. Because the better your credit rating, the higher the likelihood of securing a more competitive interest rate.
Are you one of the Penrith residents juggling multiple repayments? Debt consolidation could be the answer.
Five key advantages of debt consolidation
For some of our clients, consolidation has proven to be the best method of debt management. And while there are pros and cons, here are the top five advantages.
Consolidation may help you pay the debt off sooner.
1. Repay your debt faster
Consider this – credit cards have a minimum payment amount per month, but no end date. Theoretically, you can pay and pay and pay and… pay.
And still be in debt.
If you have a few credit cards and are making minimum payments, then you’re in a vicious cycle and (more than likely) getting nowhere fast.
Consolidating those repayments, though, into a single loan gives you a framework for managing your debt. Your payments are fixed, and you have a clear end date. With a plan, you’ll know exactly how much you’re paying, and for how long.
So if you crunch the numbers, you may just find that you’ll pay less interest and pay the loan off faster than you would by making minimum payments month-to-month.
2. Simplify your finances
Money is the biggest cause of arguments and a major contributor to stress. If you’re juggling a mortgage, car repayments, a personal loan and/or credit cards, it’s no wonder you feel constant pressure. Tracking due dates and varying payment amounts is a job unto itself.
Managing one loan – a single payment schedule with a fixed payment amount – can alleviate the stress of juggling multiple due dates and varying amounts. Simplifying payments not only gives you peace of mind, but also helps with payment consistency; exactly what you want for future you.
3. Lower your interest rate
According to the Reserve Bank of Australia, the average standard credit card rate is 19.94%, with the average balance being almost $3k.
A personal loan, however, can range from 6% to 36%, with rates varying depending on the lender and your credit history.
Your mortgage broker will walk you through specifics but, with consolidation, you’re likely to get a lower interest rate than the one you’re currently paying on your credit card.
4. Avoid credit card chaos and better manage your repayments
We’ll be the first to say that credit cards undeniably have their place. Some people are brilliant at managing their monthly spend and paying off the balance at the end of the month. But when unexpected debt hits, credit card chaos can quickly follow.
If you have multiple cards and managing repayments becomes overwhelming, consolidating those payments into a single payment can simplify your budgeting, giving you peace of mind.
It also gives you certainty with repayments – no more up and down depending on what you owe and what the interest rates are doing. Instead, know how much is due and when, so you can budget accordingly.
5. Improve your credit rating
Making regular, on-time payments will undeniably improve your credit rating over the long term. Instead of the constant juggle and the risk of missing a payment or three, being singularly focused may just help you establish a favourable payment history. And trust us – future you will thank you.
Five key disadvantages of debt consolidation
As we mentioned earlier, it’s not all rainbows and butterflies – debt consolidation can come with a few drawbacks.
1. It’s not a fairy godmother that removes your financial problems with a wave of her wand
Just because you’ve consolidated the debt doesn’t mean you’ve eliminated it. You still owe the money, just to a (potentially) different institution with different payment terms. Rolling all your smaller debts into one larger debt may make it easier to manage but the fact remains – the money still needs to be paid.
2. It doesn’t prevent you from accruing more debt
Rolling your debt into a singular loan doesn’t guarantee that you won’t go into debt again. There are a million and one reasons as to why we incur debt, with each of us juggling our own needs, wants and emergency non-negotiables.
While consolidation can leave you feeling like a weight has lifted, it’s important that you establish a saving pattern to prevent it reoccurring.
Some of us are wired to manage our financials the way our parents did and are a product of our upbringing, which means that if you didn’t have strong financial role models then you may fall into overspending or relying on credit. Instead, establish a budget and stick to it.
3. You may incur some costs to consolidate your debts
Again, this is where a broker gives you an advantage.
They’ll talk you through your options and highlight the various fees attached to each one.
These can range from balance transfer fees through to closing costs and even annual fees, but having someone on your side to work through the fine print ensures you have an exact understanding of all the costs involved.
4. You may pay a higher interest rate
While your mortgage broker will obviously work hard to secure you the best deal, there are some things that limit our superpowers. A history of excessive debt or missed repayments may flag you as a credit risk, limiting our ability to negotiate a lower interest rate.
5. You may pay more over the life of the loan
Depending on the terms of your new loan, it’s possible that the loan amount and loan term mean you pay more in interest over the lifetime of the loan.
Again, work with your mortgage broker to crunch the numbers and see if debt consolidation is the best solution for your situation – the last thing you want is to end up more deeply in debt.
How to consolidate your debt
Start with identifying your debts – how much you owe, who you owe it to, and the interest rates. Then ask your mortgage broker to help crunch the numbers. If you don’t have one, we’re always happy to help.
It’s important to be aware of the advantages and disadvantages of debt consolidation – it’s not all sunshine and roses, but it can be a good option if you’re unable to effectively manage multiple repayments across different types of credit.
Critically – don’t see consolidation as a last resort. It’s an option to be considered before you get too deeply entrenched in the cycle of debt overwhelm.
If you’re worried about your debt, or just keen to see how it could be more effectively managed, let’s chat.
 finder.com.au March 2021