What is debt consolidation?

28 October 2021

Did you know that, just like your body or your lifestyle, your debt level can be classified as either healthy or unhealthy? An example of healthy debt could be a mortgage, where you make manageable monthly repayments and end up owning a tangible asset – your own home. Debt becomes “unhealthy” when it becomes unmanageable and the person in debt is struggling to meet multiple minimum repayments without substantially paying down the amounts owing. Money, effectively, is going down the drain if you’re not making repayments as expected. Enter: debt consolidation. 

The first step

If you self-diagnose your debt situation as unhealthy then it’s worth looking into ways to improve your financial situation and money management and avoid unnecessary financial stress. Managing multiple repayment terms on credit cards or other credit products can be stressful – and poorly managed debt can affect your credit score if you are not making your repayments on time, as well as just having multiple credit products on the go.

The solution could be debt consolidation: rolling all your debts into one financial product with a single monthly repayment and potentially on a lower interest rate. This can substantially restore your financial empowerment and save you both money and stress over the long term. 

Debt consolidation options 

There are several options available for consolidating debt. The right one for you will most likely depend on your personal preferences and circumstances, with a little research you’ll be able to narrow down exactly which option is best suited for you. 

Common methods of debt consolidation are:

  • transfer all your individual debts to a single, low-interest credit card
  • a debt consolidation loan
  • home loan top-up

What you should consider when consolidating your debts

When seeking a debt consolidation solution, you should consider interest rates, establishment fees and ongoing account fees, or you could end up paying more than necessary. When comparing products, a reputable financial comparison site can help you look into upfront and ongoing fees plus penalties for paying off your existing loans early as well as interest rates.

You should also look at the term for the new loan you are considering and work out how much you will be paying over the life of the loan. In general, the longer the loan term, the lower your regular repayments will be, but the more you could be paying in total due to interest accruing over time.

Another aspect to consider is the features available, such as the ability to make extra payments without incurring a fee, or perks and benefits on products like credit cards.

If you are considering a debt consolidation loan your eligibility and the interest rate you qualify for may be affected by your credit score. Some lenders offer lower rates to borrowers with a solid credit score.

Where to find help

All this may sound complicated – and it is! However, the eventual benefits to your financial health are well worth the time and trouble spent seeking the best solution for your situation.

There is help available (for free) through the National Debt Helpline. ASIC’s MoneySmart also has plenty of information and resources on managing debt.

It might be a bit confronting initially, but once you’ve done the research and decided on the right product, you’ll have an easily managed debt with a clear timeline of when you’ll be totally debt-free. No need to continue juggling multiple repayments, just easier cash flow and financial empowerment.

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Important Information

The content on this page is general information only, it is not intended to be advice or a substitute for professional financial advice. It does not take into account your situation, needs or objectives and you should consider whether it’s appropriate for your situation and seek professional advice. 

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