Should You Consolidate Your Debt?

Paying off more than one debt at a time is not uncommon, but if you’re struggling to balance your debt repayments, debt consolidation may well be worth considering.

Being in debt can affect your life in more ways than you might imagine. Creditors can make your life miserable. Poor credit can ruin your chances of getting a loan or getting the job you really want. The added stress of dealing with financial problems can even have a destructive effect on your personal relationships.

A person can end up in debt without realising it. Getting a credit card, taking out a loan or making a major purchase can put you in debt if you don’t have sufficient resources to cover the expenses. Loss of employment can easily put one in debt. You may have a good job and good credit, then suddenly you find yourself out of work and the debt begins to mount. Before you know it your good credit is dwindling as you struggle to make your payments. When you fall behind, debt quickly takes hold of your life.

Whether you are teetering on the edge of bankruptcy or just trying to better manage your finances, you can’t help but notice all the advertisements touting debt consolidation. So what exactly is it?

Debt consolidation is bringing all your existing debts together into one new debt, which can help you manage your repayments and give you a clearer picture of your financial future. 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.

If you have three different credit cards with debts of, for example, $3,000, $4,000 and $7,500, you’re likely to also have three different interest rates and to be making three different repayments at different times each month.

This can feel overwhelming and complicate managing your cash flow. The interest rate on one card may be significantly higher than the others – and if the highest rate is on the card with the $7,500 debt, you could be paying plenty each month just to cover the interest, let alone paying down the debt itself.

One option you have to consolidate your debts is to take out a single personal loan to pay off each credit card and any outstanding

“Consolidation may be a useful strategy in some situations, but you need to understand the principles involved in any borrowing.”

interest. With a personal loan you’ll have just one repayment to make every week, fortnight or month over a set term – you can usually choose your own frequency of repayments.

And if the interest rate on the personal loan is lower than your credit card rates – and they often can be – this can help you get ahead in reducing your overall debt. Consolidation may be a useful strategy in some situations, but you need to understand the principles involved in any borrowing. First, it is the height of financial irresponsibility to take out a loan with a term that exceeds the life of the asset purchased with the loan. Debt consolidation loans promise a lower rate, but there are traps. So, is debt consolidation a good option for you?

Advantages of consolidating your debt are: • A potentially better (lower) interest rate • Repayments that are easier to manage • A means of providing a clear timeline outlining when you’ll be debt-free

Taking out a personal loan can also help with your budgeting. Instead of just having to make minimum repayments as you do on credit cards, you’ll have to make set repayments that cover both the loan amount and interest, which you know will end at a certain date.

Getting out of debt isn’t going to happen overnight, but the longer you try to avoid the debt the more it will continue to mount. Consolidating and slowly chipping away at it can finally get you ahead.