Debt consolidation: How to do it

A credit card here – those credit card rewards were just so tempting – a store card there and perhaps a car loan as well. It’s easy to end up with more personal debt than we bargained for. Sometime consolidating all that debt, putting a regular repayment plan in place and making a fresh start can be the way to go.

If you are considering debt consolidation, what are some of your main options?

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Credit card

One option is to transfer all your existing debt onto a single credit card.  In addition to making it easier to manage your debt by collecting it all into a single parcel, you can often pay back your debt at a lower interest rate.

Some financial institution offer balance transfer deals, where you can transfer your outstanding debt onto a new credit card at a honeymoon rate (which may be 0%) for a certain length of time.

If you are considering this though, you definitely need to think about the annual fee attached to the balance transfer card. Just because a card has a long 0% timeframe, it’s not necessarily going to be the best deal if it comes with a high annual fee.

Also, find out exactly how long the introductory rate lasts for, and how high the revert rate is after this time, otherwise you could end up just adding to your debt.

You can compare credit cards here.You can compare credit cards here.

 

Personal loan

Another debt consolidation option is to take out a personal loan.

Personal loans can be either  secured or unsecured, and may offer a lower interest rate than credit cards.  Secured loans can use your house, car or other assets as security, and typically have lower interest rates than unsecured options.  However, if you encounter financial problems and default on your new loan, you might lose your house or your car.

Unsecured loans don’t use your assets as security, but usually have higher interest rates than a secured loan.  Further, these types of loans can be harder to obtain, particularly if you have a bad credit rating.

Currently on CANSTAR’s database, the lowest personal loan rates are:

10.50% – Secured

12.65% – Unsecured

Rates current at 23/7/15.

You can compare credit cards hereYou can compare personal loans here.

 

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Home loan

If you have an existing home loan, you could potentially transfer your debt onto your mortgage. With the official cash rate now just 3.00%, home loan rates are competitively low.

However, there is a danger here that, despite minimizing your monthly repayments, you might end up paying off the debt over a much longer term, costing you more in the long run.  Fortunately, this can be avoided by paying more than the minimum each month.

Despite all these options, it might make more sense to talk to your credit providers instead. Rather than consolidating, it can be more effective to leave your debts where they are and talk to each of your credit providers about repayment strategies. Credit providers don’t want you to default – that just loses them money.  Many providers will work with you to develop a repayment plan, which, depending on your personal circumstances, might be the most effective option.

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