If you’ve found yourself spending a little bit too much recently, it might be worth considering some form of debt consolidation.
Put simply, consolidating debt means taking out a new loan to pay out your other debts. Ideally, the new loan will come with better terms and a lower interest rate, helping you to get on top of your debts.
Generally speaking, short-term finance, with things like credit cards, comes with very high rates of interest. Even in the current environment of low interest rates, a credit card can still have an interest rate that is above 20%, and that excludes all the ongoing costs and fees. Similarly, other types of finance, including personal loans and car loans, are also likely to attract higher interest rates, which certainly apply if the debt is unsecured.
Depending on your personal situation, you might be able to take out a new loan to cover your other debts, which would also have the added benefit of letting you pay down those debts faster, saving a significant amount of interest.
It is important to note that you will need to assess, not only the interest rates and fees that you are currently paying, but also the costs of paying out any of your other debts, to determine whether it is worth consolidating your debt. A mortgage broker is the best person to talk to, as they can assess your situation quickly.
How to Consolidate Debt
Personal Loan:
One of the most common ways to consolidate your debts is by taking out a new personal loan to pay out the other debts. A personal loan can be either secured or unsecured, depending on your personal situation, and this is normally a good option for someone with a lot of credit card debt.
Credit card debt is usually quite easy to pay back, and by taking out a personal loan, you will generally be able to get a lower interest rate, with the added benefit of having a fixed payment schedule.
It is important to consider the term of the loan when looking at personal loans. You don’t want to take longer to pay off the loan, just because your interest rate drops, as you could then find yourself paying back more interest over a longer timeframe.
Home Loan:
If you’ve already got a home loan, whether it’s for your own home or an investment property, it’s possible to use that to consolidate your debts.
Generally speaking, home loans come with some of the lowest interest rates of any form of debt, thanks to the robust nature of the property market, and the fact that a home loan is secured by the property itself. The simplest way to consolidate debt would be by using funds that you already have to pay down debt, either through a redraw facility or from money that is sitting in your offset account.
If that’s not possible, you could also look at refinancing to free up and spare equity, and use that to pay down the debts. Using a home loan is a great option for most types of debt, because of the low interest rates they offer. But again, it is worth looking at how much interest you’ll be paying, given the extended duration of a home loan.
It is important to note that there are significant costs that can come with refinancing and taking out new home loans, so it is important to consider them ahead of time. Banks also require valuations, which cost money too.
You will need to have built up equity in your home or investment property as well, as lenders are normally only willing to lend up to 80% before other costs (such as LMI) make debt consolidation too expensive.