What is debt consolidation?
Debt consolidation is combining all your existing debts together into one new debt, which can help you manage your repayments and give you a clearer picture of your personal finances. You typically do this by taking out a new personal loan to repay your other existing debts and then paying this new loan back over a set term.
Debt consolidation may be a suitable option to help reduce the stress of multiple debts, repayments and interest rates.
Paying off more than one debt at a time is not uncommon. Many households now have a mortgage, car loan and credit cards to juggle. However, if you're struggling to balance your debt repayments, debt consolidation may well be worth considering. To start, see if you can relate to the following scenario:
A scenario that could lead to debt consolidation
Here’s where you could benefit from debt consolidation:
Let’s say you have a regular credit card, and you’ve also taken out a store card to buy a new fridge with 12 months interest-free.
You decide to concentrate on paying off your credit card because you have a whole year before interest kicks in for the store card.
Flash forward to the 12-month mark. Suddenly, your hot water system needs replacing and you’ve found out you need expensive dental work done. Unfortunately, your credit card is maxed out, and the store card for the fridge with its high interest has now been added to the repayments.
One repayment’s due on the 15th of each month, another on the 30th. You’re finding it hard to meet your repayment obligations and are starting to wonder how you’ll manage.
While these purchases can be justified and were affordable at the time, with unexpected emergencies things can get hard to handle. And when debt causes stress, it’s time to take back some control.
How to consolidate debt
Gather documents and information about all your debts
In order to take control of your debt and get on top of your finances, it's essential to know how much debt you have. Log into your Online Banking or print out statements and review the following:
How much do you owe on each debt?
The interest rate you are paying on each debt
What are the monthly fees on each debt?
Any break costs
Debt consolidation and refinancing
Before consolidating your debts or refinancing existing loans, it's a good idea to compare the interest rate for the new loan (as well as the fees and other costs) against your current loans. Make sure you can afford the new loan repayments. Speaking to one of our lenders about your options is a great place to start.
Things to consider:
If the new loan will be more expensive than your current loans, it may not be worth it.
Other costs, such as application fees and any other fees associated with securing your loan against your home or other assets.
The term of the loan. While a lower interest rate will help loan repayments, a longer term could mean you pay more in interest and fees in the long run.
Look for the comparison rate. This is the true cost of the loan, factoring in fees and other costs.
Do consolidation loans hurt your credit score?
Every application for a loan or credit is included in your credit report. A consolidation loan will not negatively impact your credit report if you make the repayments and avoid defaulting on those repayments.
What is the best loan to consolidate debt?
A personal loan is an ideal loan for debt consolidation. At Horizon Bank, our range of personal loans can be secured or unsecured depending on your individual circumstances. There are many options available; speak with one of our lenders to see what suits your financial needs.
Taking out a personal loan can also help with your budgeting and money management. Whilst credit cards only require you to make minimum repayments, with a personal loan you’ll have to make set repayments that cover both the loan amount and interest, which you know will end at a certain date. The easiest way to do this is to set up a payment schedule. This will also encourage regular saving and discipline with your money. We an also help with making automatic repayments.
Get the help you need
If you're finding your debt difficult to manage, the earlier you take action the better. You can access financial counselling information from ASIC’s money smart website.
Get in touch with the friendly local team at Horizon Bank today. We're here to help you with your banking needs.
The content in this article has been prepared by Horizon Bank for general information only and it is not intended to be professional advice. It does not take into account your objectives, financial situation or needs. You should seek your own legal, accounting, financial or other professional advice where appropriate, and consider the relevant Product Disclosure Statement and Terms and Conditions before deciding whether to acquire any products or services offered by Horizon Bank and/or its affiliated partners. We do not recommend any third party products or services referred to in this article unless otherwise stated and we are not liable in relation to them. Any links to third party websites are for your information and we do not endorse any content on those sites. Horizon Credit Union Ltd ABN 66 087 650 173 AFSL and Australian Credit Licence Number 240573 trading as Horizon Bank.