Debt consolidation is a strategy to combine several loans into one new loan
As the end of the year gets closer, it’s always the time to start reflecting on what we could do better in 2024
'New year, new me'. or something like that?!
In fact, more than 42% of Aussies have planned a finance goal for the new year. And the biggest focus for 2024is closing out debts and shifting other debts around - Tetris style.
You may have a credit card debt here, a HECS debt over there, a car loan somewhere else. Sometimes managing these debts can feel like finding a matching pair of socks in a messy room.
So debt consolidation is like gathering all these clothes and organising them into one neat wardrobe.
This is the finance strategy where you combine several loans into one new loan.
Let’s say you’ve got 2 credit cards and a personal loan. They all have different interest rates, repayment amounts and due dates…
By consolidating these debts, you might be able to take out a new loan which covers all those debts.
This means you can close out your existing debts and bundle everything together with one lender, so that you have a single loan and single monthly repayment.
It sounds pretty simple, but there are actually quite a few things at play so we’ve collated some of the pros and cons to help you weigh your options.
Single repayment:
Debt consolidation streamlines your debts down to one monthly repayment that covers all your debts. This can make it easier for you to create your budget.
Lower interest rate:
If you consolidate your debts, you want to find a rate that's lower than your existing debt, which means you pay less overall to clear your debt.
Shorter repayment term:
Simplifying your repayments means you can pay off your debt more quickly, and reduce the length of time it takes to repay your full debt.
Fees
The new loan might have a hefty establishment fee or other ongoing fees that outweigh other benefits. Most consolidation opens include establishment or balance transfer fees.
Early repayment penalties:
Your existing loans might have penalties for paying them off early
Longer repayment term:
A debt consolidation loan might have a longer term than your existing loans, so it could take you longer to get out of debt and you’d end up paying more interest over time
The truth is, debt consolidation should only really be used as a last resort.
And it’s not a solution that addresses the root cause of accumulated debt which could be due to lifestyle choices or poor financial management.
The better way to approach your debt would be using the snowball or avalanche method to pay down debt one by one.
No not this snowball
Having a budget and developing healthy spending habits is essential if you’re going to make consolidating your debts work for you.
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