What is debt consolidation?
Debt consolidation, also known as refinancing, is rolling multiple debts and loans in to one joined loan. There are many benefits to this – however, there are some risks that you need to be aware of.
Consider: Unrealistic Promises
It’s unrealistic to believe that a company is able to completely free you from debt. Don’t trust a company that promises you this, and look out for ones that:
- Are not licensed
- Ask you to sign blank documents
- Refuse to discuss repayments
- Won’t put all loan costs and the interest rate in writing before you sign
- Arrange loans that don’t fit your needs – ie. they organise a business loan when all you need is a basic consumer loan.
Check out ASIC’s Professional Registers to ensure the business is on one of these lists:
- Credit Registered Person
- Credit Representative
- Credit License
Consider: Ensure You’ll be Paying Less
Know what your interest rates and repayments are for all your current loans. Make sure you compare the new loan, including all fees and costs, to your current loans to ensure you will be paying less. If the new loan will be more expensive than your current ones, make sure you can afford it and consider if it’s really worth consolidating.
When comparing current vs new, remember to check for extra costs such as:
- Fees for paying your current loan off early
- Application fees, legal fees, valuation fees and stamp duty. If the new loan is secured against your home or other assets, some lenders may charge these fees.
Be cautious of switching to a new loan with a longer term – the interest rate may be lower but you could end up paying more in interest and fees longterm.
Consider: Protecting Your Home
For lower interest rates, there is an option to turn your unsecured debts (such as credit cards or personal loans) into a singled secured debt. With this secured debt, you’d but up an asset such as your home or car as security.
If you can’t pay off your loan, the asset that you put up as security may be at risk. The lenders are able to sell it to get back the money you borrowed.
Seriously consider all other options before using your home or other necessary assets as security.
Consider: Other Options
Talk to your lender
If you’re struggling to pay, have a chat to your mortgage provider as soon as possible. Many have programs to help in tough times and they may be able to change your loan terms, reduce or pause your payments for a little while. Ask to speak to their hardship team about a hardship variation.
Consider switching home loans
You could save money in interest and fees by changing home loans. But make sure you look carefully to ensure it will be a better deal – consider getting in contact with a mortgage broker. Many mortgage brokers don’t get paid by you, they receive a commission from the bank for referring you (the commission is usually a very similar amount between banks) so you know they’re looking out for your best interest and will truly find you the best deal for your circumstances and finances. Book in a complimentary review here.
Talk to your credit providers
If you have other loans or credit card debts, check in and see if they can change your repayments or extend your loan. Check out tips on how to negotiate payment terms on the National Debt Helpline.
Consider a credit balance transfer
A balance transfer is another way to get on top of your debts – you can move your amount owed from one credit card to a new one. Usually you do this when there is a particularly good interest rate or special deal, make sure that you pay your debt off during the specified timeframe of these deals and you’ll save money.
Make sure you check how much you can transfer and stay on-top of spending with the new card, otherwise you may end up with even more debt and no control. If you’re really struggling with repayments, this might not be the best method for you.
Get professional advice
Financials advisors can help provide insight and advice for managing your finances to help you get on-top of your debt. They’ll look at your entire financial position, and help you come up with a plan to pay off debts and help you plan for your financial future. If you’d like to have a complimentary, obligation-free chat to a financial advisor, you can book in here.