Debt consolidation involves rolling various debts – such as credit cards, store cards and personal loans – into a single loan or card with one interest rate and one repayment. There are many ways you can consolidate debt – into a credit card using a balance transfer, for example – but here we’ll discuss streamlining your debts into an unsecured personal loan.
Consolidation can be useful if you have too many repayments to track. In some instances, debt consolidation can allow you to get a lower interest rate on the total amount of debt. It can also help you reduce the number of fees you pay, since you could only be paying one set of charges on a single loan.
If you’re thinking about consolidating your debts, it’s wise to carefully consider whether it’s right for you. Here are four questions that may help you decide.
How much can I afford to repay?
Consolidating debt may change the size of your repayments – if you’re streamlining a number of credit cards into a single unsecured personal loan, for example, your regular repayments might become higher, even if you end up paying less in interest.
It’s important to factor how much you can afford in regular repayments when deciding whether to consolidate debt. Review your budget to work out how much you could reasonably afford to repay weekly, fortnightly or monthly. Then focus on meeting those repayments so you can pay your debt off once and for all.
If you ever find yourself struggling to make card or loan repayments, contact your bank to determine which options are available for you. If you’re a St.George customer, you can contact St.George Assist on 1800 629 795.
How long will my loan last?
Setting an end date for your debt can help you commit to the idea of paying it off sooner. You might find a debt-free date is a practical and exciting goal for you to work towards. However, a shorter loan may mean higher regular repayments so keep in mind the budget you set in question 1.
It’s important to understand that the term of your loan can affect the amount of interest that you will pay. A new loan might get you a lower interest rate, but if you have longer to pay off the debt, you may pay more interest over the life of the loan. Consider whether consolidating debt will simply extend a loan that you’ve already made headway paying off – and end up costing you more in the long run.
Could I pay less to maintain the debt?
This is important to investigate – if you’re not going to benefit financially from consolidating your debts into one loan, you may simply be better off rearranging your budget so you can put more into existing debts and pay them off sooner.
One way of figuring out if you’ll benefit from debt consolidation is to compare interest rates. Look at the rates on your existing debts – whether they’re personal loans or credit cards – and then check the rates your bank offers for unsecured personal loans. Use these rates to calculate how much you’re likely to pay over the life of each loan.
If you could end up paying less interest with a new loan than you would have to pay to pay off your current debts, it might be financially worthwhile for you to consolidate existing debts into a new unsecured personal loan. But remember to consider any break costs or early repayment fees on existing loans.
What about my old debt?
If you consolidate, it’s important to close the old cards or loans so you stop incurring fees and charges on them and aren’t tempted to continue using them – that will only stand in the way of your plan to set a realistic end-date for your debt.
Remember – debt consolidation is a tool. You could use it to take control of your repayments and make things that little bit easier to manage.
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This information is prepared without knowing your personal financial circumstances. Before you act on this or any information, please consider if it's right for you. If you need help, call 13 33 30.