Many of us are paying off multiple debts at one time, whether it’s a credit card or two, personal and car loans, HECS, or even our AfterPay account. With different repayment schedules, interest rates and balances - it can be overwhelming even for the most experienced money manager.
Not just that, but debt can get out of hand quickly, weighing on us heavily if we can’t see any light at the end of the proverbial debt tunnel.
Alternatively, it might be that while you’re successfully managing your debt, the way it is structured could be negatively impacting your borrowing capacity or cash-flow.
But did you know that you could bring together all of your debts into one repayment by taking out a personal loan or by releasing equity in your property to cover them all, and often at a cheaper rate? Let’s unpack debt consolidation and how to reduce the stress of multiple debts.
How does consolidating debt work?
Whether you call it consolidating or refinancing, the goal is the same: to roll all your debts into one place to make it easier to manage your repayments.
Typically there are three ways you can do this:
- Bring all your debts together into a single loan with a fixed-term and (ideally) a lower interest rate to help manage and speed up your repayments.
- Transferring your debts into your existing mortgage by refinancing to a new, bigger loan or by applying to increase your existing home loan (as long as your lender is willing to do so).
- Transferring your credit card debt to a new card with a balance transfer offer (which means you can access a low or even 0% interest rate on your balance for a period of time).*
*Be careful doing this as it can negatively impact your credit score in the short term if you ‘churn’ cards too often
This act of putting all of your debt into one place is key to helping you take back control of your finances. It allows you to make one clear, periodical repayment at a uniform interest rate, rather than juggling lots of different debts at different rates.
Why would I bother consolidating my debt?
We get it: bringing all your debts together can sound like a tonne of work without a clear reward. But, consolidating your debt can potentially speed up your journey to important milestones like purchasing a home or investing in shares. And here’s why.
One easy-to-remember repayment
Bringing all your debts together in one place means you’re only liable for one repayment every week, fortnight or month. It gives you clarity and confidence knowing you’ll never miss a payment, can help you better manage your cash-flow, and even help you get ahead on your repayments. If you like knowing exactly how much your repayments will be every month, a fixed rate loan will allow you to set a specific repayment schedule for the entire loan term. Alternatively, if slow and steady isn’t your style, a variable rate loan will generally allow you to make additional repayments at no little to no extra cost.
Lower fees and interest rates
Moving to a new product gives you the chance to shop around and find the best rate in the market. Plus, by consolidating your debts into one product you’re only being charged for one set of fees (rather than paying fees for every single credit card or loan you’re paying off).
Keep track of how close you are to the finish line
With all your debts in one place, you can instantly check-in on how far you are from your goal of being debt-free. This takes the guesswork out of calculating multiple repayment schedules to keep you motivated and on-track towards a debt-free future.
What debts can I consolidate?*
It’s important to consider exactly what types of debts you can consolidate before getting started. Broadly speaking, here are the kinds of debt that can be consolidated:
- Credit card debts
- Car loans
- Personal loans
- Unsecured personal loans
- Utility bills
*It’s important to note that not all debts can be consolidated (e.g. tax bills), so it’s always important to speak with a finance professional, who can help you navigate your options.
Will it reduce how much I have to pay each month?
One of the biggest potential benefits of debt consolidation is its ability to lower costs. By taking out a debt consolidation loan, you may be able to access a lower interest rate and avoid the costs of paying for multiple sets of fees and interest charges for each of your debts.
Plus, if you choose to refinance and bring your existing debts into your home loan, you’ll usually access a lower interest rate than most personal loans and credit cards will offer.
When should I consolidate?
If you’re finding it difficult to make headway on your debts (and are only repaying interest each month), consolidating your debts in one place might make sense for you.
It’s also important to understand the impact existing debt can have on your borrowing capacity when applying for a new loan. When deciding how much they’re prepared to lend, a lender will take into consideration your existing debt, as well as any lines of credit or credit cards that you have open. Therefore, it can be helpful to close unused credit cards, consolidate your debts into one place, and pay down as much of your debt as possible before applying for a loan to give yourself the best chance of approval.
Alternatively, if you’re looking to improve your cashflow, debt consolidation is often a good place to start. For example, by reducing your existing loan repayments through debt consolidation it’s possible to free up more income for saving, spending, investing, or paying down your existing loans even faster.
What does consolidation look like?
Let’s look at an example to show this process in action.
Say you have three credit cards: one with $8k debt, another with $15k debt and the final one with $20k debt. In total, that’s $43k in credit card debt, each at 16% interest rate.
By making the minimum repayment of $872 across each card, you’d pay back $124,427 to the banks over 52 years.
However, if you consolidate these debts into a $43k personal loan, over a 5-year term with a minimum repayment of $913, you’d pay back $54,817 to the bank and clear the debt in 5 years. That’s $69,610 less and 47 years less, just for an extra $41 a month.
Want to check how this could work for your debts? Check out MoneySmart’s credit card calculator to figure out how long it will take you to repay your debts.
If you’re looking to refinance your home loan, our team can help you navigate this process and give you a clear snapshot of your options to find the best solution for you. Get in touch with us to find out more.
What do I do next?
It really depends on your needs!
If you think you’re paying too much in interest and fees, are struggling to meet existing loan obligations, would like to increase your cash flow, or simply want to make managing your debts easier then it might be the perfect time to explore your consolidation options.
Or, if you’re looking to increase your borrowing power for a new mortgage, personal loan, or otherwise, then it might be the perfect time to chat with an expert about the most efficient way to structure your debt and credit cards.
Consolidating your debts won’t get rid of the balance entirely, but it can make your repayments easier to manage. By understanding your options and the types of debt you can consolidate, you’ll be able to figure out how to best make your next move based on your situation and financial goals.
The finance information contained in this post is general advice only, and doesn't take into account your personal circumstances or goals. You should always reach out, or seek professional advice, before making any financial decisions.