Debt consolidation

Having multiple loans can creep up on you.

Let’s say you took out a personal loan for a holiday you couldn’t quite afford outright when you were younger. Perhaps a year or two later you took out a car loan because the weekly repayments sounded far easier than a $40,000 lump sum. Several years after that, maybe you decided to buy a house and took on a mortgage. Suddenly, you’re managing three repayments with different banks at various times of the month.

Combining several debts into one single loan, otherwise known as debt consolidation, can make good financial sense as well as significantly lowering the stress load of managing such a hectic financial schedule. However, it needs to be managed correctly.

Some of the benefits of consolidating your debts into one loan can include:

• less paper work (you only receive one set of statements)
• the convenience of dealing with just one lender
• one monthly repayment (making budgeting easier to keep track of)
• saving on loan fees and charges by paying them on just one loan
• potentially a lower interest rate, particularly if you use your home loan to consolidate debt, which can create significant financial savings overall.

This all sounds like a no brainer so far. However, there can be pitfalls too, including:

• lender fees (you may need to pay application fees or exit fees if you are taking out a new loan or getting out of an existing home loan early)
• government charges (some duties and taxes may apply if you are using your home loan to consolidate your debt)
• if you are extending the length of a loan, for example moving a personal loan of five years onto a 30-year home loan, the overall interest charge will be much greater unless you continue to make the same cumulative repayment amounts as prior to the consolidation.

Clearly, every situation is different and it’s essential to do the calculations to determine if debt consolidation is right for you. A good mortgage adviser will be able to help you crunch the numbers, look at available loan options and their features, and find the most suitable loan solution for your unique situation.

They will also be able to assist you in creating an ongoing financial management plan, which is essential in successful debt consolidation to ensure you save money over the long term and don’t get caught out by the pitfalls.

Debt consolidation is worth considering if you have multiple debts, particularly if you are going through financial hardship. Once you do consolidate and get your finances under control, be sure not to fall back into bad financial patterns. Staying in control of your finances is the key to avoiding financial stress.