Debt Consolidation – Tips and Traps

All your debts in one basket - Why home loan debt consolidation could be the right move.

A lot of small debts can balloon into one big headache. A simple way to get things under control could be to refinance your home loan to consolidate debt. So – is it right for you?

What it is

Simply put, debt consolidation is combining all your debts – credit cards, car loans etc. – into one single debt with a single monthly payment. When they are individual loans each of them have their own specific interest rates, conditions and balances – so rolling them all into one loan is both efficient and easy to manage.

But before you head down the debt consolidation route, here are some of the upsides and downsides to help you make a well-informed decision.

The upside

• Instead of several times a month, pay once. Managing your debt becomes a lot easier when you pay down all your credit cards - as well as any interest you owe - with one repayment every week, fortnight or month over a fixed amount of time. There are less headaches juggling money when it is just one transaction.

• One fixed rate and term. This gives you certainty over payment amounts and keeps you disciplined in paying down debt. If your credit cards just keep cycling down and back up to their limits again, this would be a real benefit for you.

• Less to pay each month. You may end up paying slightly more overall but stretching the term on your loans means that you could well be spending less each month and if you are in a real bind with debt, give you some of your life back.

The downside

There are always pros and cons to any loan decision. Here are some of the cons of using a home loan for debt consolidation:

• You could accumulate more debt. When you consolidate debt, you free up credit. This might make you think you can spend more and, as a result, you end up with even more debt than you had before (unless you close your old cards and accounts – and you should do that!)

• Pay more overall. A loan with a longer term can help you reduce your monthly repayments but a longer term means more interest overall, especially if you run it over a home loan term

• Your credit score could take a hit. In the event you don’t keep up with the single monthly repayments on your loan, you could end up hurting your credit score or be in serious financial hardship.

If you’d like more information talk to us today about how we may be able to put you in touch with a lender that can help you consolidate your debts.

Sometimes, the answer might not be using the equity in your home (or that might not be possible). There are other lenders that offer debt consolidation as personal loans and we have access to a range of them.