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When you have multiple personal debts, trying to get out from under them all can feel quite overwhelming. Consolidating your debt into one single repayment may make matters easier to manage and help you get out of debt faster.

It’s not the right answer for everyone and there are some drawbacks to consider. However, in some cases, it can be a useful strategy for getting your debt under control. Over time, this can also help you improve your credit score, which has many important financial benefits for your future.

Debt consolidation at a glance

What is a debt consolidation loan?

A debt consolidation loan is when you take out one loan to cover several outstanding debts, so that all of your debt is consolidated into one single loan repayment subject to a single interest rate with a single monthly repayment. This can help make managing your debt situation significantly easier and often you can end up paying less each month than you were paying before.


Pros

  • One payment can be easier to manage than multiple repayments to many creditors.
  • A debt consolidation loan may offer lower interest rates and repayments, which can reduce the interest and fees you are paying. This, in turn. can free up some money that you can use to get out of debt faster.
  • There’s a lot of competition in the market currently, so you can, and should, shop around for a good interest rate and loan terms.

Cons

  • You need to be certain that you are able to meet your repayments for your new consolidated loan. If you’re already struggling financially this may not be possible.
  • Debt consolidation could get you deeper into debt by enabling you to borrow more money.
  • If you have a poor credit history, the new lender may not approve the loan.

TIP: check what your weekly payments would be on a debt consolidation loan with this handy calculator from NOW FINANCE


Consolidating your debt via your mortgage


If you have a mortgage, you may be able to use the equity available in your property to repay other high interest debts. It may allow you to consolidate your current monthly repayments from all your debts into one convenient repayment. Because interest rates on mortgages are typically lower than other personal debts – particularly in the current low-interest rate home loan environment – this may reduce your interest costs and the amount you repay each month.


Key things to consider

If you consolidate your debt through your mortgage, it will likely mean a longer loan term, and could see you pay more interest, even if rates are lower.

If you are struggling to keep up with your debts, the ability to borrow more money could see you fall deeper into debt. You’ll need to be disciplined about not acquiring new debt to replace the old. Cut up old credit cards, resist new credit offers, and close down your old debt accounts so that you’re not tempted to use them.


Impact on your credit score

Any time you apply for a new loan or change your existing loan product it can create a credit enquiry on your file – too many of these can have a negative impact on your credit score. So, while you absolutely should shop around for the best product, it’s best to only apply for the product you’ve decided is the best option for you after you’ve done all your research.


Consolidating your debt via your mortgage

If you have a mortgage, you may be able to use the equity available in your property to repay other high interest debts. It may allow you to consolidate your current monthly repayments from all your debts into one convenient repayment. Because interest rates on mortgages are typically lower than other personal debts – particularly in the current low-interest rate home loan environment – this may reduce your interest costs and the amount you repay each month.


Key things to consider

If you consolidate your debt through your mortgage, it will likely mean a longer loan term, and could see you pay more interest, even if rates are lower.

If you are struggling to keep up with your debts, the ability to borrow more money could see you fall deeper into debt. You’ll need to be disciplined about not acquiring new debt to replace the old. Cut up old credit cards, resist new credit offers, and close down your old debt accounts so that you’re not tempted to use them.


Impact on your credit score

Any time you apply for a new loan or change your existing loan product it can create a credit enquiry on your file – too many of these can have a negative impact on your credit score. So, while you absolutely should shop around for the best product, it’s best to only apply for the product you’ve decided is the best option for you after you’ve done all your research.

Know your credit score and how your credit score is calculated to avoid running into issues down the line.

Getting out from under debt can be challenging but it is possible with a strategy in place, whether that’s debt consolidation or finding other ways to save money, pay off debt faster, and improve your financial wellness.

Make 2020 the year that you commit to getting out of debt and know that you can achieve it.

Stay on top of your debt and your credit score. Remember to check and monitor your Score for FREE with us.



Disclaimer
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* This article was sponsored by NOW FINANCE (a trademark of Wingate Consumer Finance Pty Ltd | ACN 158 703 612 Australian Credit Licence number 425142) and written by GetCreditScore.

GetCreditScore act as a credit intermediary and do not provide personal financial, legal or tax advice, or credit assistance of any form. Any content featured here is of a general and informative nature only and does not take into account your personal objectives, financial situation or needs. You should consider your needs, along with the product's terms and conditions before making a decision; and where appropriate, seek professional advice from a finance professional such as an adviser. We do not accept any liability in respect of any product or service which you elect to acquire from any provider.