Debt can come in many forms. You may have just received your shocking Christmas credit card bill and your car repayments are due… or maybe you took out a loan for your overseas vacation last year and still have that lingering debt from when you splurged.
Whatever the reason for your debt, consolidation can often be a handy option, where you roll all your debt into one low rate personal loan (giving you some much needed breathing room!)
So to help you attack your debt and live a financially free life sooner, we’ve put together the whys and hows of using a personal loan to consolidate your debts:
1. Look for a low rate debt consolidation loan
The whole point of debt consolidation is to rid yourself of a sky high interest rates and ongoing fees, right? So finding a low rate and low fee personal loan should be your first priority, because if you end up paying a higher interest rate you’ll be worse off than where you started.
2. Budget for everything
A low interest rate personal loan isn’t the only major consideration when it comes debt consolidation, as you also need to ensure that you budget for the application and ongoing fees of the new loan.
It’s a wise idea to use a personal loan repayments calculator to work out what your fortnightly or monthly repayments will be (including any ongoing fees) on the new loan and ask yourself “do I have the capacity to service the new loan realistically?”
3. Look for a short term loan
While it’s true that interest rates attached to home loans are significantly lower than credit cards (around 6-7%) when compared to personal loans and car loan interest rates (anywhere from 10-20%), don’t fall into the trap of consolidating your debt into a home loan.
Even if you have one of the lowest rate home loans on the market, you’ll still end up paying more interest over the life of the loan. Instead, look at paying off your debt over the short term with a fast approval loan.
Let’s give you a scenario. Say your debt amount is $5,000. If you consolidate that onto your $300,000 home loan with an interest rate of 6%, over 30 years you will pay $5,791 in interest.
By comparison if you roll that $5k into a personal loan with an interest rate of 15% with a 2 year term, you will pay a total of $818 in interest.
We know which option we would choose!
4. Beware of balance transfer revert rates
An alternative to rolling over your debts into a personal loan, is putting your credit card debt into a balance transfer credit card. While these cards usually have very low rates for a set timeframe, keep in mind once the introductory period comes to an end, it will often revert to the much higher cash advance rate, usually over 20%.
So unless you know you can pay off your debt within the intro period and won’t be tempted to spend on the card, avoid a balance transfer and instead opt for a personal loan.
5. Don’t borrow more money
Once you’ve consolidated your credit cards and loans debt into one low rate loan, don’t be tempted to accrue more debt. Even if you have to freeze your credit card, do it! Borrowing more money will only get you further into the red.
6. Set a budget
Of course, debt consolidation is only one part of the solution to getting yourself free of debt. It’s also important to remember that the best strategy to living a debt free life is always creating a budget that you can stick to and avoiding impulse purchases on your credit card.
Ready to ditch the debt? Get a personal loan to consolidate your debt now!