If you’re starting to lose track of multiple loans and feel like you’re stuck in a vicious cycle of high-interest charges, debt consolidation might be for you.
What Is Debt Consolidation?
Debt consolidation is simply the act of combining multiple loans into a single new loan. It works by paying off your existing debts and rolling their balances into a single loan with a more competitive interest rate.
Debt consolidation gives you better control over your debt, as you only have one regular payment to deal with at a lower interest rate. It also sets a clear time period for paying off your debt, which means you can save money by nixing the loan faster.
Common types of debt consolidation include credit card balance transfers, debt consolidation personal loans, debt settlement, home equity loans and home refinancing.
Credit Card Balance Transfers
This type of debt consolidation allows you to roll your debt from one credit card to another—it’s a straightforward way to consolidate your debt, secure a better rate and lock in lower fees. In some cases, it’s possible to move other types of debt to a credit card, too. Look for credit cards that offer an introductory period of reduced (or zero) interest when customers transfer their debt.
Debt Consolidation Personal Loans
This type of personal loan funds the payment of all your other debts and leaves you with a single payment on a regular schedule. A personal loan for debt consolidation can work in your favour, but only if the interest rate and potential savings work to your advantage.
This option is seen more as a last resort when other options still leave you in a position of unmanageable debt. You will need to hire a debt settlement company to help negotiate a monthly payment plan with your lenders.
Home Equity Loans Or Refinancing
For those with assets in real estate, a home equity loan can replace your existing debts with a more competitive loan depending on how much equity you have. Refinancing is another great option for consolidating debt. A little research is needed, but then it's a simple matter of speaking to your broker or bank to ask for a better deal.
Secured consolidated loans like refinancing and home equity loans are excellent for scoring an interest rate that is much lower than credit card and personal loan rates, plus they can be added to your mortgage as a separate loan to be paid over a shorter term. The downside is that if you default on payments, you could risk losing your home.
Who Is Debt Consolidation Ideal For?
When deciding whether debt consolidation is a good fit, always start by researching what’s available to you and if there’s a good chance of saving money through lower rates and fees. If you’re confident you can meet the repayment schedule and pay off the debt within five years, debt consolidation is a smart way to fast-track you towards your financial goals.
Top Tips For Debt Consolidation
If you’re looking to consolidate debt through refinancing or a home equity loan, it’s important not to overlook loan affordability over the entire loan term. Mortgages usually have terms ranging from 15 to 25 years, and given that loan interest charges are calculated daily, this could mean that you end up paying more interest if your consolidated loan is configured to be paid over a longer period of time. To avoid the effect of compounding interest, opt to repay your loan over the shortest term possible.
Understand The Terms
Make sure you read the fine print and ensure you thoroughly understand the loan terms and repayment schedule. Ask lots of questions and never rush into any decisions. Be on the lookout for potential hidden costs such as penalties for paying off your loan early, application fees, legal fees, valuation fees, and more.
You can avoid the debt trap by not taking out large limits on credit cards. Only set the limit to what you strictly need to avoid getting carried away. Most importantly, don’t get into the habit of paying only the minimum repayment each month—set your credit card to repay in full instead.
If you don’t have a budget, make sure you create one and follow it. The last thing you want is to end up in another cycle of debt. It’s crucial that you learn to live within your means by only spending what you need and no more. If you can’t afford something, don’t buy it on credit. Definitely steer clear of buy now, pay later apps!
If possible, try to sell things in your home to repay some of the debt. Boost your income by taking on a second job or find a job that pays more. Consider reviewing your financial situation with a financial counsellor - check Moneysmart for a listing of free counsellors in your area.
Seek Professional Advice
Make sure your financial know-how is up to scratch so that you’re able to stay in the best financial shape possible after conquering your debt. There are plenty of resources out there that will cover all the basics you need to know; the Mum CFOs Money Masterclass online course is a great one for this. You can opt to do the whole course or select whichever module is most relevant to you.
Financial issues can arise at any stage in life and it can be all too easy to fall behind in bills, especially if your life circumstances have changed. Though there is no one-size-fits-all solution to money woes, but debt consolidation can be a great way to buy some breathing room and give you the fresh start you need to reset your financial outlook.
Want to know more about managing your money? Check out five tips for dealing with the rising cost of living here.
Louisa Sanghera is the founder of award-winning mortgage broking firm Zippy Financial, and an expert in the Mum CFOs Money Masterclass, an online comprehensive course that gets mums back on their financial feet.
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