A credit card (or three) may have seemed like a good idea initially – think of the frequent flyer points! But if you are struggling to balance multiple repayments at multiple interest rates, debt consolidation could be the answer.

Debt consolidation, or refinancing, involves taking out a new loan to repay your debts and any outstanding interest so that you only have to repay a single loan weekly, fortnightly or monthly for the life of the loan. 

By refinancing multiple debts into a single loan, you can also potentially save money by reducing the amount of interest owed on the loans.   

Alternatively, you can apply to take out a balance transfer card, which can be used to pay down credit card debt.

If you have accumulated a large balance on a credit card with a high annual percentage rate, transferring that balance to a card with a lower interest rate; ideally 0% for at least a year, will allow you to focus on paying back the principal without the interest.

This could potentially save you a significant amount of cash that would have originally gone to interest payments.

But debt consolidation isn’t for everyone; it could also get you deeper into a debt spiral if you are easily swayed by the temptation of more credit.

Why might you consider it?

Debt can become unmanageable for a range of reasons; you may have lost your job, as many have, as a result of the COVID-19 crisis, or perhaps you have fallen behind on bills or your credit card debt has snowballed out of control.

Maybe, it’s all of the above.

Establishing a clear plan will help you keep focused, allowing you to take control of your finances and get back on your feet.

Key advantages

There are quite a few advantages of consolidating your debt; the first of which, and possibly most desirable, is that it helps you transform the stress of multiple debt repayments into a single, streamlined payment – with an end date in sight.

Having less debt collectors hanging over your head can also make you feel more in control of your financial future – and it also means there is less chance that you will accidentally miss a repayment, which can ultimately impact your credit score.

Consolidating your debts could also lower the regular repayment figure, helping to make it more manageable for you to budget to meet your repayments.

There is also the possibility that the interest rate paid on the loan could be significantly lower, which will lead to further savings over the long term.

First steps

First up, assess your financial situation by identifying all the loans and credit cards you currently have, how much you owe in total, and how much you are repaying on a weekly, fortnightly, monthly basis.

Once you have a good understanding of the size of your debt, start investigating options in the market to consolidate or refinance.

Consider whether you need the assistance of a broker or other professional adviser to assist you in understanding the differences between the different products in the marketplace, and whether certain products might be more suited to your individual financial objectives, situation and needs.

Part of this process should be figuring out whether you can actually afford the new repayments.

It is important to compare the interest rate, fees and any hidden costs of the new loan against your current loans to make sure that you are getting a better deal.

There may be other costs involved in refinancing your loan, such as penalties for paying off your loans early or establishing fees, legal fees, servicing fees, and stamp duty. All of these factors are important to consider before consolidating your debt.

Be on the lookout for secured loans, which is where you put up an asset, such as your car or home, as security for the debt. While the interest payable on repayments may be lower than other forms of consolidation loans, your car or home could be at risk if you default on your repayments. If you do, the lender may be entitled to sell the asset to make back the money that you borrowed.

Some banks are providing six-month loan repayment deferrals to consumers impacted by the COVID-19 crisis. As this initial six-month period comes to an end, if you are still currently facing financial difficulty or a reduced income due to COVID-19, you may be eligible for an additional four month repayment holiday. Speak to your financial adviser or your bank to see if you are eligible.

Does debt consolidation impact your credit?

Debt consolidation could either help or hinder your credit score, depending on how disciplined you are.

If you are on time with your repayments, eliminate or reduce your debt and diversify your lending profile (for example, by having both credit card accounts and a personal loan), you can improve your credit score.

Alternatively, your credit score could deteriorate if you continue to charge your credit card after you pay off your balances, or if you are late making your payments on your consolidated loan.

The verdict

Debt consolidation could give you a new lease on life – helping you catch up on your bills and stop living paycheck to paycheck. It could also change your spending habits for the better, helping you learn to live “within your means” and commit to not accumulating further debt in the future.

It’s important to do your homework and make sure you are making a decision suited to your individual financial situation and needs; there’s no point consolidating your debt if it’s going to leave you worse off over the long-term.

We recommend reaching out to a professional financial adviser if you need help establishing a plan to eliminate debt. A financial adviser may also be able to help recommend a strategy and the products that suit your individual circumstances.

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This blog is published by Verve Superannuation Pty Ltd (ABN 65 628 675 169, AFS Representative No. 001268903), which is a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956, AFSL 238184), as the Sub-Promoter of Verve Super. 

Verve Superannuation Pty Ltd and True Oak Investments Ltd are not licensed to provide personal financial advice. The information contained in this blog, including any financial guidance, is general in nature. You should consider seeking independent legal, financial, taxation or other advice to ensure that your financial decisions are suited to your unique circumstances.

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