Is Debt Consolidation a good idea? Well, it’s complicated. No two cases of debt are the same so while Debt Consolidation can be a good idea for some, it might not work for everyone. The following article will provide you with enough information and insight so you can decide if Debt Consolidation is right for you.
What is Debt Consolidation?
Debt Consolidation is a way of combining a number of debts into one, easy-to-manage repayment. There are different options available to help consolidate debt, such as:
- A Debt Consolidation Loan
- Consolidating your debts through a Mortgage Refinance
- Credit Card Balance Transfer.
The goal of consolidating your debts is to save money. Debt Consolidation can help with this in a number of ways, including:
- Eliminating multiple interest payments
- Eliminating multiple account keeping fees
- Improving cash flow by lengthening the term of the debt
- Providing interest-free promotional periods
Debt Consolidation Loan
A Debt Consolidation Loan is a loan large enough to pay off your existing unsecured debts, leaving you with one debt to repay. Depending on the loan, this could mean a cheaper interest rate, savings on fees and improved cash flow. This is because your debt is spread over a longer term.
Debt Consolidation Loans can be difficult to access. This is because people who are in need of a debt consolidation loan are usually having trouble paying their debt. Any defaults on your credit file will make it more difficult to secure a loan.
Debt Consolidation through Mortgage Refinancing
Debt Consolidation through Mortgage Refinancing allows you to consolidate your personal loans and credit cards to your home loan, and pay a lower interest rate. This also means that you are able to reduce the amount you pay each month. While interest rates for credit cards and personal loans are usually high, mortgage refinance is available at a much lower rate.
Credit Card Balance Transfer
You can consolidate credit card debt with a balance transfer. Banks are always in high competition with each other for customers. They will offer incentives to attract new customers including interest-free periods on balance transfers. You may be able to transfer the balance of your credit cards onto one new card with a 12-month interest-free period. This will give you 12 months to pay off your credit card balance without worrying about accumulating interest.
When is Debt Consolidation a good idea?
Debt Consolidation is a good idea if your debt situation has not escalated too far out of control. If you are only just starting to feel the pinch from your debts and haven’t missed a repayment yet, you are a good candidate for a debt consolidation loan. Most of the time, consolidation loan amounts are quite large to cover off a number of debts. Many traditional lenders won’t consider people who have a bad credit rating or are deemed ‘high risk’ in determining if they can the repayments for the term of the loan. There are options for people with bad credit to consolidate their debts, through a non-conforming lender.
When is Debt Consolidation a bad idea?
The whole point of consolidating your debts is to give you a bit of breathing room to catch up on your repayments and reduce your debt quickly. If you consolidate your debts, you shouldn’t take out another line of credit (a loan or credit card) until you have made significant headway on your consolidation loan. If you are planning on consolidating your debts to free up some extra cash to take out another loan, you should consider other options.
It comes down to the type of debts you are trying to consolidate. If you have a number of debts all with penalty fees for breaking the agreement early, the money you save from consolidating might not be worth what you pay for these fees. Debt Consolidation could put you in a worse off position financially.
What else is there other than Debt Consolidation?
While Debt Consolidation is a common form of debt relief in Australia, it isn’t always the best option for people struggling with debt. There are a number of debt relief solutions available in Australia to assist people to get back on financial track. If you feel confused or overwhelmed by your debt situation, you can call Debt Rescue to talk about your circumstances. Our Case Managers can go through your financial situation with you and suggest the best debt relief solution for your circumstances.
Informal Debt Agreement
An Informal Debt Agreement is a contract between you and your creditors outlining a new repayment schedule which is affordable and convenient for you. The new repayment terms might include:
- Pay off the debt in one reduced lump sum
- Pay off a reduced debt amount over a specified period of time through regular repayments
- Freezing the interest and fees on the debt
- Paying only a percentage for each dollar owed
- A combination of the above
A Case Manager will arrange an Informal Debt Agreement by negotiating the terms on your behalf. As soon as an Informal Debt Agreement is in place, your creditors must stop all recovery action, meaning the harassing communication will come to an end. The best part about an Informal Debt Agreement is that it is not marked on your credit file like a formal Part IX (9) Debt Agreement is. You also won’t be listed on the National Personal Insolvency Index. This is, therefore, a better solution for business owners, tradesmen and professionals who may be restricted regarding employment whilst bound by a formal agreement or Bankruptcy.
A Debt Agreement is a binding agreement under Part IX of the Bankruptcy Act 1966. In the agreement, you and your creditors will agree to a satisfactory amount you will need to repay under the Debt Agreement. Proposing a Debt Agreement is similar to declaring bankruptcy, but you are not subject to as many of the restrictions bankruptcy has. A Debt Agreement is an option to assist you with unmanageable debt and is an alternative to bankruptcy. Debtors are released from the agreement and debts once they have completed all payments and obligations.
Is Debt Consolidation a Good Idea?
So is debt consolidation a good idea for you? Debt Consolidation is based on individual circumstances, and there are a range of other debt relief solutions available if Debt Consolidation is not for you. If you are unsure about your options or want more information, call Debt Rescue to speak with a Case Manager on 1800 00 3328.