Debt: it’s a word that can weigh heavily, yet it’s a part of life for most Australians. The key is finding a way to manage it effectively. If you’re feeling the weight of mounting costs building up, debt consolidation is one practical way to ease the pressure.
What is debt consolidation?
Debt consolidation involves combining multiple debts into a single loan.
For example, let’s say you owe:
- $3,000 on one credit card
- $2,500 on your other credit card
- a personal loan of $4,000,
- and you also owe $12,000 on your car.
Some of these debts can come with high interest rates and different due dates, which can be hard to keep track of – making it feel almost impossible to get ahead.
By consolidating your debt into one loan, you have one repayment to make each month. And if the new loan comes with a lower interest rate, sticking to your regular repayments could help you pay it off faster – while making it easier to keep track of what you owe.
Make a plan to consolidate your debt.
Granted, no one likes looking at their debt situation. It can feel like opening a drawer that's overflowing; you’d rather keep it closed and pretend it’s not there. But to bring your debt under control, it is important to know where you’re at.
Here is how to start:
Understand your debt.
One of the first steps in understanding how to consolidate your debt is knowing how much debt you have and where it currently sits.
Look at things like:
- How much do you owe across all of your debts?
- How much interest are you paying each month in total?
- Where are you paying too much in fees?
- What are the exit conditions of each debt?
- Is there anything you can pay off right away?
These questions can help you decide how to consolidate debt in a way that works for you. Getting a copy of your credit report can also help you see how your outstanding debt has affected your overall position and how you can improve it for the future.
Make a budget.
We often spend more on everyday expenses than we realise. To save and start paying off your debt, try strategies such as:
Use the snowball method.
The snowball method is a popular debt consolidation method. It involves paying off your smallest debts first, then rolling those payments into the next smallest. Helping you build momentum and stay motivated as you go.
To get the (snow)ball rolling, start by clearing your smallest debt. Then, take the funds you were putting towards that payment and add it to the next smallest debt. Continue the process until you have created a dapper and debt-free snowman.
Bundle debt into your mortgage.
Home loans generally have much lower interest rates than credit cards or personal loans. If you already have a mortgage, debt consolidation could be as simple as rolling your debts into your home loan to reduce your overall repayments. Here’s how it can work and what to consider:
- You can refinance to either top up your current loan to pay off other debts, or switch to a new, larger loan if it offers a better interest rate or improved features.
- While it does mean your overall loan will take longer to pay down, the repayments on your debt consolidation could be much lower.
- If you can afford to, you could pay some of the extra you’re saving to bring the whole balance down sooner.
Debt consolidation misconceptions and FAQs.
There are several ways you can consolidate your debt. It’s important to find the right solution for you and the debt you’re facing.
How do you consolidate debt?
Some options include using a balance transfer credit card or refinance your mortgage to include other debts. The right option depends on your situation and financial goals.
Is it a good idea to consolidate debt?
Whether debt consolidation is a good idea depends on your individual financial situation.
It can simplify repayments and potentially lower interest rates, making it easier to manage your debt. However, it's important to carefully consider any fees, the length of the loan, and your ability to maintain consistent payments. If done thoughtfully, it can be an effective strategy for managing debt.
Do all debt consolidation loans hurt your credit score?
While applying for a debt consolidation loan may temporarily lower your credit rating as it triggers a credit enquiry, if you make consistent, on-time payments, your score may improve over time. It is important to manage your new loan responsibly.
Should I consolidate debt with my partner?
If you’re considering debt consolidation with a partner, understand that you could become responsible for a loan that was originally only theirs. With a joint debt, both parties are legally responsible for the full amount.
Do you need good credit for debt consolidation?
You don’t need perfect credit to consolidate debt, but having a good credit score can make it easier to access better loan terms and lower interest rates. If your credit is less than ideal, you may still be eligible for a debt consolidation loan – just keep in mind the rates might be higher.
How can I spot a debt consolidation scam?
Unfortunately, there are debt consolidation scams out there where people pay setup fees but never receive the loan. Money scammers are becoming increasingly active and sophisticated in their tactics, so it’s important to always be vigilant in your banking.
Never respond to an unsolicited email or debt consolidation ads on social media. If you’re considering a debt consolidation loan, always stick to reputable lenders and make sure they’re licensed by the Australian Securities and Investments Commission (ASIC).
Is financial hardship help available?
Life can throw unexpected surprises at us. If you’ve lost your job, suffered an illness or injury, or been affected by a natural disaster, ME Bank want to help you manage your financial position. Through our Hardship Assistance Policy, we may be able to help with any difficulties you’re experiencing.
Let ME help.
If you’re worried about managing your money or upcoming payments, we’re here to help.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.