Consolidating debt is a great way to get on top of your finances but eliminating multiple repayments as less repayments can be easier to manage plus in most cases you should be paying a lower rate. 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. Things to look out for:
Repayment Terms
If you are consolidating personal loans and credit cards into a home loan, you need to ensure that the loan term is no more than 2-5 years on that portion of the loan. Personal loans and credit card debt can have an interest rate above 20% but a home loan debt with a rate of 4% may seem attractive at first but over 30 years you will actually pay more interest than if you didn’t consolidate this debt. This is because you have this debt for a much longer time.
Closure of Credit Cards
What we’ve seen time and time again is people consolidating their credit card and personal loan debts into a home loan and then keeping their credit cards as they are with their current limits resulting in them using this facility again and bringing the debt back up to the limit eventually. Should you consolidate these debts into a home loan our recommendation is reducing or closing down these facilities. 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.
So what’s the advantages?
- 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.
If you need advice to reduce your debt, give Ozgur our debt consolidation expert at BlueCherry a call on (02) 9897 1039 to book an appointment or email ozgur@bluecherryloans.com.au
