Debt consolidation can streamline your debts and trim your overall repayments, but there are some pitfalls you should avoid.
Along with a home loan, many of us have a credit card or two, maybe a personal loan, and possibly even a car loan. Juggling all these different debts can be challenging. It may also mean you are paying a range of different interest rates – some going as high as 20% when it comes to credit card debt.
One way to streamline personal debt and potentially lower your total repayments is by folding several high-rate debts into one low-rate loan – usually your home loan. It’s a process known as ‘debt consolidation’, and while it can deliver worthwhile savings, you need to think carefully about whether it’s the right solution for you.
Approach with care
A key downside of debt consolidation is that you could turn a short term debt like a personal loan into a longer term debt. That means paying interest for a far longer period, and over time you could end up paying more in total interest charges.
That’s why debt consolidation works best if you are prepared to knuckle down and make extra repayments on the new, enlarged home loan. This will help you pay off the debt sooner and maximise the interest savings.
It’s also important to avoid reloading a freshly cleared credit card with new purchases. If you’re bitten by the born-to-shop bug your best bet may be to cut up the cards altogether once you’ve consolidated the debt.
Avoid a band-aid solution
If you’re considering consolidation because your debt levels have become unmanageable, it may be time to take serious action. Consolidation may only provide a band-aid solution if you’re struggling to control spending. Learning to live within a budget can help, or it could be worth speaking with a financial counsellor to get your finances back on track.
Contact us for more information on debt consolidation – and whether it could be the right move for you.