How debt consolidation can save you money

11th April 2016

It is no secret that the practise of spending with borrowed money can sometimes get out of hand. It’s all too easy to swipe your credit card for a quick grocery shop, or choose the more expensive alloy wheels when opting for car finance. That feeling of “free money” is short lived, especially when your bank account is reduced to single digits after unexpected repayment deductions. If this sounds like you, understanding the concept of debt consolidation is important.

Let’s call the woman in the above photo Sally. Sally has one fixed term home loan and one variable home loan. She has one credit card with a $4,000 balance, another with a couple of hundred left, and a personal loan she took out for a new pushbike. Sally also owes $7,000 on her Honda Civic. All month, various amounts are being debited from Sally’s account to pay off her multiple debts. $100 here, $50 there. It is impossible for her to keep track of the never ending repayments. Which one is which? When is the next one due? How much of all this money is simply paying interest?

This is the perfect scenario to highlight how debt consolidation can help. If Sally were to approach her broker, a conversation around “refinancing” would likely ensue.

Credit cards and personal loans often come with considerably higher interest rates than your average mortgage. This means you may get caught in the vicious but common cycle of paying off the interest, without actually making a dent in your negative balances.

Debt consolidation allows you to combine all of your niggling debts into one or two loans, which simplifies repayments and can significantly reduce the interest being paid.

Another reason to consolidate debt is to eliminate the risk of making additional purchases with borrowed money. Credit cards are especially risky as further debt is just a swipe and PIN entry away. A debt consolidation loan does not have a credit facility, meaning obtaining further credit and incurring subsequent debt is no longer a risk. You will be provided with a structure that aims to eliminate your debt, without watching it accumulate further.

When consolidating, it is common practice to use the equity in your home in order to increase your borrowing power. With enough equity, you can top up your mortgage to incorporate all of your smaller, troublesome debts.

If you have repayments in abundance, or so many credit cards that your wallet won’t close, it might be time to think about debt consolidation.

Who knows - if Sally had consolidated earlier, she might have avoided the need for a personal loan by purchasing the pushbike with money she saved on interest.

Everyone’s situation is different, so before making any decisions be sure to contact My Local Broker to see if debt consolidation is right for you.

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