The pros and cons of consolidating your loans
Debt payment reminders are coming in droves and fast – for your credit card, your other credit card, and maybe a car or personal loan, as well as home loan payments.
Trying to manage multiple debts can be so overwhelming that it’s easy to get your head in the sand.
But if you can’t make your repayments on time, the first thing you need to do is contact the company you owe, explain your situation, and agree on a payment plan.
You can also consider consolidating your debts into one loan – a process known as debt consolidation.
History Chief Executive Officer of Wealth Management Anne Graham said that combining your debt into one loan and having only one repayment, every fortnight or every month, can make debt easier to manage.
“It helps you feel like you’re in control,” she said.
“You’ll be able to keep track of what you owe much more easily. “
Combining different debts into one loan with a lower interest rate can also save you money.
But don’t fall into the trap of thinking it still is.
If you put your credit card debt on your home loan, even though you will have a lower interest rate, you will likely pay off the loan for longer.
Ms Graham cautions against using debt consolidation as a band-aid for a deeper problem, adding that some people combine their debts but end up taking on more debt.
“Consolidating debt doesn’t necessarily solve the problem of accumulating debt all the time, but it could help people reduce their debts once they are faced with their problems,” she said.
She said that transferring debt from one credit card with a higher interest rate to another with an interest-free period only works if you pay off your debt within the interest-free period and cut the new card off. credit afterwards so that you don’t be tempted to use it.
The snowball method
Ms Graham said that rather than consolidating your debts in some cases, it is better to use the snowball method, which involves building momentum to clear your debts.
“One of the reasons you can’t consolidate your debt is that there is a theory that if you have four different loans and focus on paying off the smallest one first, it makes you feel like you are in debt. ‘accomplishment,’ she said.
“So once that one is paid off, you can redirect the payments to the second biggest, then the third biggest, then the last. “
If you are considering consolidating your debt, it is worth shopping around, not only with your current bank, but also with various lenders, Ms. Graham said.
This might involve doing some research using comparison websites such as Canstar, RateCity, Finder, and Compare the Market.
Your credit score will play a role in a lender’s approval of your loan application, and you can get your score for free by applying to rating agencies such as Experian or illion, according to the Moneysmart website.
If you need help managing your debts, you can get free, independent advice by contacting the National Debt Helpline 1800 007 007.