In certain situations and when managed well, debt can be a positive thing.
It can help us develop important budgeting skills, build credit ratings and invest in future assets.
But when left unmanaged, getting into too much debt can happen all too easily to anyone, in all walks of life.
Not only does having too much debt affect our financial security – giving us less disposable income and affecting credit scores, but it can also cause a great deal of emotional stress.
This is when Debt Consolidation can help. Debt Consolidation is a process of rolling your debt into one easy to manage payment – preferably at a reduced repayment and lower interest rate, offering you greater control of your financial situation.
Paying off high-interest debt is a smarter move when it comes to credit behaviour, so look at prioritising the transfer of your debt to a lower rate product to free up your cash flow first.
There are many ways to consolidate debt, depending on your situation, but there are three common tactics you should consider first.
Credit Card Balance Transfer
A credit card balance transfer means transferring credit card debt to a new credit card. Effectively, you’re just moving your debt from one place to another but in doing so, you can reduce the amount of interest you’re paying each month.
There are a number of credit providers that offer interest-free (0% interest) periods between 12 – 36 months, meaning you can afford to pay off the debt more easily in the budgeting timeframe.
To help you find the best provider for you, take a look at some comparison sites such as Finder and Canstar, which often list the best deals of the month.
Some pitfalls to be aware of when considering credit balance transfers:
- It can affect your credit rating – Be careful not to overuse this tactic as jumping from card to card can negatively affect your credit score
- Application fee – There is usually an up-front payment to credit transfers, which will range depending on the amount you’re transferring
- Credit limits – New credit limits are only advised after the application has been assessed and these sometimes don’t cover transfers
A personal loan is when you’re given a lump sum of money – these are usually up to the value of $50,000.
When used responsibly, personal loans can help plug a gap in your budget for big purchases (such as weddings, holidays or home improvements) without risking losing other assets.
If you’re considering a personal loan, take the time to do your research. Get to know which bank will offer you a personalised rate based on your credit history.
Personal loans offer flexible loan terms up to 7 years and interest rates are often fixed – meaning the interest won’t fluctuate while you’re repaying the loan.
Some pitfalls to be aware of when considering personal loans:
- High rates – Repayment rates for personal loans are relatively high (often above 7%) so keep this in mind when you’re budgeting for this strategy
- Credit scored – Applications are credit scored, (debt consolidated doesn’t rank high)
- Fees and penalties – These loans often have an application fee and can charge high penalties if payments are missed. Before applying, make sure you’ve read through the fees in detail
Refinancing Your Home Loan
Consolidating debt into your home loan (also known as refinancing your mortgage), can help bring different debts together in one more manageable payment.
The biggest potential benefit to this strategy is that you can even put what you save on interest elsewhere, towards making extra repayments to the loan.
To help manage this and free up equity, opt for a reduced loan term on the consolidated amount. This is on the assumption that capacity to service is demonstrated over a reduced term. Alternatively, take control by setting up a manual transfer to the loan within an agreeable timeframe.
Some pitfalls to be aware of when considering home loans:
- Long loan term – Loan terms can be up to 30 years, meaning you might have a greater amount of repayments over time
- Ties up equity – This strategy locks in your equity for lifestyle / recurring expenses
- Application and on-going fees – There are usually high application fees that can set you back thousands
- Insufficient equity – You may not have enough equity available for the amount you need to borrow
There are a couple of loan options or balance transfer deals that could help you save money and put you ahead of your finances. Every situation is different, so make sure you explore what’s best for your personal circumstances. A mortgage advisor can help simplify the process and take care of the heavy research loading.
Debt can mount up easily for anyone so whichever strategy you use, make sure you’ve weighed up both the short-term and long-term benefits to find the right solution for you.
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While all reasonable care is taken in the preparation of this article, to the extent allowed by legislation Findex Group Ltd accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice.
Findex Group Ltd assumes no obligation to update this content after it has been issued. The information contained is of a general nature only and you should consider whether the information is suitable for you and your personal circumstances. You should seek professional advice and speak to a qualified adviser before acting on any material.
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