If you’re a regular reader of Slice, you’ll know that clearing your debt is one of the most important steps to attaining financial freedom. One way to attack your debt – especially if you have multiple loans – is to speak to your bank and combine everything into one loan with one interest rate. Instead of juggling multiple payments each month, you only have to worry about one.
This is called debt consolidation – here’s what you need to know.
Debt consolidation check list
✓ Do you have multiple loans with high interest rates? If you have lots of high-interest rate loans (like credit card and store card debts) and you’re having trouble keeping track of multiple monthly payments, debt consolidation can simplify your life and reduce the risk of missing a payment. It might also help you save money. A consolidation loan typically comes with a lower interest rate, meaning you'll pay less in interest over time.
✓ Do you have a good credit score? If you do, you're more likely to qualify for a consolidation loan with favourable terms and a lower interest rate. Read more: Six tips to improve your credit score
✓ Do you want to be better at money? If you've made positive changes to your financial habits and you’re committed to avoiding new debt, consolidation can be an effective way to pay off your existing debts. This is especially true if you’ve addressed the underlying issues that led to your debt in the first place.
✓ Do you have a stable income? If you have a stable income and you’re able to make consistent payments, consolidating your debt can help you manage your debt more efficiently.
Potential red flags
✗ Longer repayment period: Your monthly payments might be lower, but the repayment period could be longer, meaning you might end up paying more in interest over time.
✗ Risk of more debt: If you’re not careful, you could be tempted to run up those empty credit cards again. Don’t do it!
✗ Poor credit score: If your credit score is low, you might not qualify for a loan with a lower interest rate than your current debts.
✗ Low debt, high fees: If your total debt amount is relatively low, the fees and effort involved in consolidation might not be worth it. Likewise, some consolidation loans come with high fees. Ensure that the total cost of consolidation (interest plus fees) is lower than what you’re currently paying.
Two common debt consolidation loans to consider
Personal loan: Banks and other financial institutions offer personal loans specifically for debt consolidation. These are unsecured loans, meaning you don't have to put up any collateral. The interest rate on a personal loan is generally lower than on your credit card, but it can vary based on your credit score.
Home equity loan: If you own a home, you might be able to take out a home equity loan or ‘line of credit’. This type of loan uses your home as collateral, which can result in a lower interest rate. But it’s risky because if you can’t make the payments, you could lose your home…
Debt consolidation can be a powerful tool for managing and reducing your debt, but it’s important to evaluate your situation and consider all your options. Now that you’re armed with the basic facts, chat to a financial advisor or debt counsellor for some personalised guidance and start chipping away. Remember, the most important thing is to start!
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