Consolidate your debt – your guide to financial freedom
What is debt consolidation | Balance transfers | Personal loans | Pros | Cons | Refinancing your home loan | Debt consolidation FAQ’s
Got a wallet full of cards? A never ending, ever increasing struggle with debt? Well you’re certainly not alone – debt is so easy to come by these days that we’ve almost become numb to it, and it’s easy to find yourself in a financial pickle.
Did you know Aussies have some of the highest household debts in the world? The average credit card debt is $4,377, and if you only pay off the minimum it would take over 30 years to pay it off?
If that fact alone won’t make you wake up and smell the coffee, we don’t know what will.
But, alas, you can now smile , as you’re here reading this guide. That means you’re already on your way to financial freedom. Say goodbye to sleepless nights as we’re here to give you some options on how to reduce your debt quicker and take back control! So let’s get started.
What is debt consolidation?
| Debt consolidation could help you to combine your outstanding debts into one convenient loan potentially at a lower rate than you currently pay. Simply put, that’s one loan, one regular repayment, one interest rate and one set of loan fees. |
When you add up all the costs of making separate repayments on all your various personal loans, credit cards and other debts, the combined monthly total can be surprisingly high.
In a nutshell, debt consolidation is when you combine all your outstanding debts across these multiple sources into just one, paying a lower interest rate.
There are a few ways you can go about consolidating your debt which we’ll go into in this guide.
Work out how much you owe
First things first, you need to find out how much you owe. You may have had your head in the sand until now, but this is the time to man-up and get calculating. (💪You’ve got this!)
Get your statements together and figure out a) how much you owe on each debt b) what interest you’re paying c) how much you’re paying on monthly or annual fees and d) do you have to pay to break the contract?
Now it’s time to start researching your options.
0% credit card balance transfers
The alluring benefits of flight rewards, low interest rates and cash back has meant it’s never been more attractive (or easy) to get yourself multitude of credit cards… and therefore multiple pots of debt.
We all know it’s far too easy to tap and think i’ll pay that off next payday but then before you know it things have quickly spiralled out of control. So what can you do?
Transferring all your credit card balances onto a new one with 0% interest rate for a set period of time can be a good way for you to start to pay off the balance of the card, rather than just paying off the minimum interest.
Start to compare credit cards which have the 0% balance transfers and move your existing debt onto that card.
But…
Don’t be fooled
The 0% balance transfer is, of-course, a promotional hook to get you to sign up to that card, so it’s usually only available for a certain period of time.
Do your due diligence to find one that offers the 0% interest rate for the longest period of time.
Always check the small print
Some activity, like paying back too much of the balance at once , may cause the interest to commence which is obviously not the aim of the game.
Make sure you read the terms in full to understand what you’re getting into.
Work out a realistic payment plan
Plan to pay off the maximum amount you can in the interest free timeframe without incurring any fees… and get your life back on track.
Last thing (the important one):
Cut up your old cards!
If you continue spending as you had previously you’re not going to be able to cut down your debt.
| Learn more about Anna’s story. | Anna, 30, from Bondi had $7,000 worth of debt across four different credit cards. At the beginning of 2020, she took back her financial freedom and consolidated her debt into HSBC’s Visa Platinum credit card with 0% interest and no fee for 22 months. She’s now paying off $1,000 a month and is due to pay off her debts by the end of the year. “At the beginning of the year I felt like I was drowning with debt. I’d been meaning to get better with my finances for ages, but just never got around to it. So at the start of 2020 I thought, this is going to be my year! I can’t tell you the relief I get each month seeing my credit card balance all in one place and going down. It’s a huge weight off my shoulders.” https://www.hsbc.com.au/credit-cards/products/platinum/balance-transfer/ Enjoy 0% p.a. interest on Balance Transfers for 22 months1 with No BT Fee SEE HSBC BALANCE TRANSFER (button) |
Personal loans
Sometimes that feeling of just knowing that a fixed amount is scheduled to be paid off each month is all that’s needed to relieve some of that financial anxiety.
Debt consolidation personal loans are when you take out a new lump sum loan to pay off all your other outstanding debts all in one go.
These loans are usually taken out for longer periods of time, with agreed interest rates, but you’ll always know exactly how much you’re paying over the course of the lifetime of your loan.
The main aim of these loans is to reduce your interest payment rates typically found with exxy credit cards and store cards. Generally speaking, credit cards charge higher interest rates, so it’s usually more expensive to have a large credit card balance, than it is to have that same balance on a debt consolidation loan. Ideally, when you roll your debt up into a single loan with lower interest rates, you’ll be better off than if you are paying all different interests on multiple debts.
Here’s an example:
Say you have the following debt:
- $20,000 car loan with a 9% interest rate
- $5,000 credit card balance with a 22% interest rate
- $2,000 on your store card with a 18% interest rate
In this scenario, your monthly repayments would be $899 and over 3 years you would pay $5,373 in interest. Whereas if you rolled that $27,000 worth of debt into one single loan with a 8% interest rate, your monthly repayments would go down to $846 and you would pay just $3,459 in interest over 3 years – that’s a total saving of $1,914 in interest.
When comparing debt consolidation loans always be wary of hidden costs like redraw fees or early repayment fees which may influence the cost of the loan. There’s always small print to consider with these things of course.
Before applying for a loan, you’ll need to work out how much debt you’re in to understand how much you need to borrow. Take a deep breath (or pour yourself a well deserved glass of wine) and add up everything you owe on each of your debts and work out how much all the repayments are on each.
Then calculate how much interest you’re charged across the debts including any annual or monthly fees and breaks costs. Once you’ve done this you’ll have a clearer idea of how much you’re actually paying each month which will allow you to look into the right type of loan for you.
Pros of personal loans:
Save time (and money)
Having to remember when-which-card-payment-is-due-when can be a logistical nightmare, and costly when you miss the deadline. Having just one payment will save you time, and money, having just one bill to keep track of
Lower interest rates
Due to the length of payment terms, loans tend to have lower interest rates than credit cards which you can use in your favour
Less is more
Having multiple bills to pay is just one less stress needed in our busy lives. Consolidated your debt into one manageable loan payment means less stress and more time for you
Keep a good financial rating
Consolidating your repayments into one manageable amount can avoid you defaulting on any payments and therefore keeping a healthy credit rating
Cons of personal loans:
“Tick tock”
Personal loans are usually long term contracts – think years not months people.Whilst it’s a good feeling to simplify your debts into one payment, it might be daunting for some to commit to such a long term solution
Do your due diligence
Without proper research you could end up paying far more in interest over a longer period of time if you don’t calculate your options
Hidden fees
What’s the saying? If it sounds too good to be true…? Make sure you’re not sucked in by marketing spiel. Always read the small print to check for hidden fees like break costs
Refinancing your home loan
If you’re already on the property ladder and also have a bunch of other debts, you may be feeling the financial strain of juggling multiple loans at the same time.
Refinancing your mortgage, and merging all your debts into your home loan can be another option to give you that feeling of financial freedom.
If you’re considering consolidating your debt into your existing mortgage, it’s important to calculate to see if the repayments will actually save you money over time.
Whilst you may feel better off each month as the amount you owe has gone down (as you’ve spread your debt over such a long period), you may in fact end up paying significantly more in interest in the long term.
On a positive note, home loans and refinancing is a competitive market right now, and there are plenty of options for you to negotiate on better interest rates, fees and features – it certainly pays to compare in 2020.
Weighing up your options
It’s important to note that these debt consolidation options only work if you’re 100% committed to take control of your spending. There’s no point consolidating your debt if you’re still going to continue to spend above your means.
Do you really need those Jimmy Choo’s or Beats headphones?
Stick to your budget, have a goal that you commit to making AND if you do find yourself more flush one month, put it aside for a rainy day, or pay off more of your debt (as long as you don’t incur a fee).
Debt consolidation FAQ’s
What is debt consolidation?
Debt consolidation helps you to combine all your outstanding debts into one ideally at a lower rate than you currently pay. In a nutshell it’s one loan, one regular repayment, one interest rate and one set of loan fees.
Is it smart to consolidate debt?
Yes, if you do your due diligence, change your spending habits and commit to paying off your debt. It can be a good way to keep your debts in check with lower interest rates so you end up paying what you owe, faster.
What is the best way to consolidate debt?
The best way to consolidate your debt really depends on your individual circumstances. Once you’ve worked out what you owe and what you’re currently paying you’ll need to compare your options to see which works best for you. The aim of the game is to combine all your debts with high interest rates to just one with rates lower than you’re currently paying.
Should I speak to my current bank about a new loan?
It’s a good idea to speak to a financial institution that already knows your credit history, but that doesn’t mean they can give you the best rates. It pays to compare credit cards and loans to give you a better idea of the market to find the best credit card for you.
Remember, loyalty may not get you the lowest interest rates, so thoroughly examine your options and read the small print before you commit to anything.
How does debt consolidation affect my credit score?
Like any form of lending, if you don’t make your repayments on time it could affect your credit rating. However, regardless of which type of debt consolidation you go for, if your application is successful and you’re always on time with your payments, it shouldn’t have a negative effect.
I have bad debt, does that mean I can’t consolidate?
All is not lost, your options will vary depending on your personal circumstances and the level of debt you’re in.
There are lenders that can help if you have bad debt, but you should consider these options very carefully.
Depending on your financial situation, you may wish to consider a debt agreement which is an act of bankruptcy, but this decision should not be taken lightly and you should get official financial advice before going down this path.
Can anyone get a credit card or personal loan?
Not everyone will be eligible to apply for a credit card or personal loan. In most cases you’ll need to be over 18 years of age, an Australian resident or permanent visa holder and have a regular income.
There is also no guarantee that you’ll be approved for the credit card or loan. These decisions are usually based on your credit history and debt product limits.
What information will be required to apply for a credit card or loan?
Typically you’ll need Details of your employer, Tax information, Income information, Details of assets, investments, savings, Debts information from credit cards or other loans and a total of your everyday expenses.
Am I charged if I pay back more of my loan than agreed?
Yes, pre-payment fees often apply if you pay off more than agreed. For example, if you sign up to a one year loan and you pay it off in 8 months, you may be charged a pre-payment fee.
However, if you find a loan with a fixed rate, then you may not be charged if you pay the loan off sooner than anticipated.
Should I be consolidating my debt in the current climate?
If you’ve recently been made redundant applying for more credit may not be a wise idea. Learn more about applying for loans and credit cards during Coronavirus.
I’m worried about my financial situation – is there anyone I can talk to?
We understand it can feel very overwhelming to feel like you’re spiralling out of control with debt.
You can always call the National Debt Hotline on 1800 007 007 for free and confidential advice from professional financial counsellors.
The hotline is open from 9.30 am to 4.30 pm, Monday to Friday.
https://www.accc.gov.au/consumers/debt-debt-collection/help-when-youre-in-debt
Conclusion – invest in you!
Want more dough? All in favour say eye!
If you’ve found that you’ve racked up a heap of debt, it’s important to remember that your financial freedom is what matters most.
Do yourself a favour and put a few hours into comparing debt consolidation options and we promise a weight will be lifted from your shoulders once you’ve found the right option for you.
General Advice Warning
The information provided is of a general nature only and does not take into account any personal objectives, financial situation or needs.
Before making a decision you should consider the appropriateness of the information having regard to your personal circumstances.
Always read the full terms and conditions.
