By Louisa Sanghera, Director, Zippy Financial
By consolidating your debt, you can take some pressure off your monthly finances.
Here is a quick experiment…
Go pick up three balls and try and juggle them. Most people, besides those who ran away to join a circus, will likely drop at least one of them within a few tosses.
Now put two of the balls aside and throw the remaining up and down with one or both hands… that is much easier to manage, right?
Well, this is not too dissimilar to the concept of debt consolidation.
If you have more than one loan – for example, a credit card, a car loan and/or a personal loan – you can reduce the stress of juggling multiple debts, payment dates and interest rates by rolling them into one easy-to-manage loan.
There are other benefits, too.
One common debt consolidation method is to take out a new personal loan and use the funds to pay off your other existing debts.
If the interest rate on the new personal loan is lower than the interest rate on your existing debts (for example, a credit card with a 17.99 per cent interest rate) this can help your pay less interest each month and avoid the nasty late payment fees that come with these kinds of cards.
By rolling all your debts into one, you can get a clearer timeline of when you can be debt-free.
Debt consolidation can also make it easier for you to manage your household budget, as you only need to factor in repayments from one debt per month instead of many.
Refinancing your home loan for debt consolidation
Another method used for debt consolidation is rolling it into a refinanced home loan because mortgages offer comparatively low interest rates.
If you are struggling with multiple debts right now, consolidating your debts into your home loan will, in most cases, reduce your overall monthly repayments.
But there is a big word of warning…
Whilst this option can reduce your monthly repayments now, debt consolidation through your mortgage can turn a short-term debt (such as a personal loan) into much longer-term debt.
So, unless you aim to make a lot of extra repayments as soon as possible, you could end up paying significantly more interest than you would have otherwise.
One way to address this issue is to create a loan split for the debt consolidation, giving you the ability to pay off all the short-term debts within a few years rather than, for example, over a 25-year home loan period.