Does Debt Consolidation Really Help?

As we head into the second month of the new year, your expenditures and bills may have started to catch up with you. Combined with costs of the new school year, or credit card statements hiking up your stress levels, you might have begun to consider possible options to lessen the strain.

Debt consolidation is probably one of those potential options you have floating around in the back of your mind. Debt consolidation is a type of refinancing that includes getting a new loan or merging your debts with an already existing loan, to pay out what you owe.

According to the Australian Consumer Action Law Centre, the most common reasons people seek to consolidate their debts are due to wanting to ‘reduce monthly debt repayments, manage one debt instead of having several debts, [and] save money by getting a loan with a lower interest rate to pay off debts with a high interest rate.’

However, before heading straight to the bank to transfer your debt into one manageable account, it’s a good idea to seek professional advice and know what the process includes and the risks involved.

The benefits?

Consolidating can lower the overall cost of your repayments by combining a number of high-interest loans such as unsecured personal loans, credit card debt and car loans, into one manageable account with a lower repayment and single interest rate.

It can also help to improve your personal cash flow.

This allows you to breathe a little more freely and offers stability in one consistent repayment that doesn’t fluctuate.

The downside?

In most cases, consolidating your debts won’t save you money. While it does reduce the amount paid every month, the costs of establishing the loan combined with the extended life of the loan may mean you could be paying more interest in the long run.

Debt consolidation is not a failsafe debt management plan. As new debts arise in the future, you might find that the likelihood of falling behind on repayments increases.

This is not to say that every experience is the same. Some people benefit greatly when they consolidate their debts – their stress is lessened and in result have more financial freedom.

Things to consider?

Before deciding on whether you want to consolidate your debts, it's best to seek expert advice and information so that you can make an informed decision. A mortgage broker will assess your finances and work with you to determine a debt management strategy to best suit your circumstances.

In the meantime, think about developing a plan of action towards trying to keep on top of your mounting debts. Start with your smaller debts and work your way up to paying off the larger ones. Some of the things to consider are to reduce the use of your credit cards, pay as much as you can towards your non-mortgage loans, and when those debts are balanced, put your extra funds towards paying off your mortgage.

At Select, we offer non-obligation, quality and free advice to help you reach your financial goals. With expert advice, we can help you determine the best plan of action to help you get on top of your financial debt. Give us a call on (08) 9417 3399 to speak with one of our brokers.