When talking about debt, paying back the money you owe is tough. Spending money that isn’t ours is a lot easier than spending our hard-earned pay. Debt seems to tempt us into spending what we can’t afford.
Spending money blindly on new things puts us on an emotional high, and we feel as though we’re getting something for nothing. But then we have to work even harder to pay back that money.
The thing is, after working so hard, we then feel we need to reward ourselves! That’s the vicious debt cycle we get trapped in. It would be funny if it wasn’t so tragic. If you’re in over your head, debt consolidation could be just what you need; let’s take a look at how this works.
What is debt consolidation?
In its simplest form, debt consolidation is when you refinance your debt by taking out one loan to pay off other loans. The main benefit of this is that you owe only one creditor. Repayments are often at a lower interest rate and spread out over a manageable time.
Debt consolidation offers two main opportunities:
- You can either decrease your monthly payments.
- You can reduce the amount you’ll pay overall.
If lower monthly payments work better for your financial situation, then you’ll need to consolidate with a longer loan term. If you’re looking to pay less for your loan, you need to consolidate with a shorter loan or lower interest rates.
Should you consider debt consolidation?
If you’re behind on multiple loan payments and have to deal with high-interest rate credit cards, debt consolidation may be an option for you. According to the National Reserve Bank of Australia, the average credit card interest rate is sitting at a whopping 19.94%.
This means that if you’re only able to make minimum payments every month and still pay the interest rates, the total cost of your debt becomes much higher in the long run.
That said, debt consolidation can provide you with a new fixed payment amount and a reasonable payment term. This gives you a predictable schedule in which to pay off your debt.
What are the pros and cons?
There are ups and downs to consolidating your debt, as with everything in life. Let’s take a further look into what is best for you:
- It simplifies repayments for you.
- Improves your credit score after you pay your debts.
- Improves your debt-to-income ratio.
- You’re able to demonstrate financial responsibility.
- It helps build better budgeting habits.
- Paying more than the minimum payment every month.
- Taking on more interest over time.
- Getting slugged with consolidation fees.
The ups do outweigh the downs, especially where you stick to your payment plans with your credit provider.
What are the alternatives to debt consolidation?
There are a few alternatives to consolidating your debt. Some of these include:
- Sticking to a strict budget. Track everything you spend before you even spend it. This includes monthly bills, internet, subscriptions, and even your morning coffee run. This will help you get out of debt sooner.
- Communicate with your creditors. It never hurts to ask. This could potentially help lower your minimum monthly payments.
- Home equity loan. This is when the borrower uses the equity of their home as collateral.
- Debt settlement. This is when the debtor and the creditor settle for less than the total amount owed. You can do this with the help of a debt counsellor.
How to avoid future debts after consolidating
After consolidating your debts into one manageable payment, you may be tempted to take out another loan or swipe that credit card again. We’re creatures of habit, and poor money habits are something we all struggle with.
Here are a few ways to avoid these bad habits:
- If you can’t afford it, put it back without whipping out your credit card.
- Create an emergency fund.
- Focus on the necessities and cut out the wants.
- Stick to a budget.
If you want some more simple tips to help with your finances, simply read our blog. Additionally, if you need some help consolidating debt, consider taking out a personal loan. Visit our website today at www.credit24.com.au to get all the details.