Guide to Debt Consolidation

Debt Consolidation

Current figures put Australia's borrowing at an all-time high, with each member of the population having an average debt of around $50,000 – twice the level of five years ago. Thankfully, total personal assets have also risen, drawn up by substantial rises in house prices, superannuation and the share market.

Nevertheless, with ever-increasing levels of household debt it's no wonder that debt consolidation personal loans are gaining popularity. If you do find yourself in the unenviable position of needing to consolidate your debts, how can a debt consolidation loan help you, and what other options are available?

How Can I Consolidate My Debts?

Home Equity

There are a number of proven methods for debt consolidation. If you have equity in your home, often the most cost-effective way may be to redraw against your home loan to pay off other debts. Not only does this make repayments more manageable, but can substantially reduce interest payments, as home loans tend to have lower interest rates than other forms of credit.

Credit Card Balance Transfers

Alternatively you could roll all your debts onto a low or no interest credit card, making substantial savings for the period of the lower interest rate. If this is your chosen consolidation method, it's important to remember that at the end of the balance transfer period, interest rates on the card are likely to revert back to a level similar to the rate you are trying to avoid by consolidating in the first place. Be aware that you need to be very disciplined if you want to consolidate your debts onto a credit card, and make sure you pay all - or a substantial part - of your debt off before the balance transfer period ends.

Debt Consolidation Loans

Personal lenders are also jumping on the debt consolidation wagon, offering personal loans specifically for the purpose. By researching the available products wisely, consumers can substantially reduce monthly repayments, putting money back into their pockets each week and make long-term savings over the life of the new loan.

The most important thing to remember if you are taking out a debt consolidation loan is to continue to pay as much as possible each month off the balance of the loan. By only paying the minimum amount per month, all debts will still be active for the whole life of the loan!

Debt Consolidation Example

Breanna has debts totalling $250,000, including a home loan, credit cards and car loan. After discussing her options with her financial adviser, Breanna has decided to consolidate her loans into one personal debt-consolidation loan.

Her current total monthly loan repayments are $2,400. By consolidating her debts into one loan, Breanna has reduced this to one repayment per month of $1,700, a monthly saving of $700 or around $170 a week.

By making additional repayments above the required $1,700 a month, Breanna can also make substantial savings over the term of the loan by reducing the total interest payments, and pay off the loan much faster.

Don't Forget …

If you take out a debt consolidation loan, make additional repayments each month to reduce the total loan. Work out a household budget and stick to it to avoid the problem happening again. If you have problems sticking to your budget, try cutting up your credit cards and change to a debit card instead. They offer the flexibility and convenience of credit cards but allow you to only use your own money for purchases.

Above all, be wary of consolidating onto an interest-free period credit card, unless you are confident you can repay the debt before the interest-free period expires. Otherwise you could find yourself back in the same position six months down the track.

If you want to know more, click here for a free, no obligation assessment to rid your debt.

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