What is Debt Consolidation?
Debt Consolidation
There are a number of ways to do debt consolidation . The basic idea is to replace some or all of your debt payments with a single regular payment. A single regular payment is often easier to manage and you only need to have dealings with one entity rather than a number of creditors. You could end up paying less due to a lower interest rate or no interest. In some cases the amount of debt itself is reduced.
What types of Debt Consolidation are available?
Unsecured personal loan.
Where your debts are immediately due, have a short term, or are from using credit cards with a high interest rate, you may be able to consolidate these debts by taking out an unsecured personal loan. The money from the loan is used to pay out your creditors.
The benefit where your debts are due or need to be paid in a short term, is that the loan would be over a longer term with a relatively low monthly payment. This allows you to pay off the debt within your budget. If you have credit card debts, although you could pay the minimum each month, the interest is likely to be significantly higher than a personal loan. Depending on the difference in interest rates and the amount of fees, there may be the benefit of an overall saving as well as being able to better manage a regular monthly payment.
To establish a personal loan you would need to show a good financial standing. There would normally be some fees to pay or to be included in the loan. A word of caution: if spending is a problem, you need to take care not to incur more debt. This can easily happen after paying off credit cards and consequently having this amount available again to charge on the card.
Refinancing.
Normally this means a mortgage or home equity loan where the loan is secured by your property. If you have equity in your home sufficient to cover your debts, then this can be a good option, as the interest rate would usually be lower than a personal loan. There will still be fees and you will still be required to establish your financial standing. However, there are a variety of mortgages now that are available if you can provide only limited or no documentation of your financial affairs. Some mortgages may be available even if you have some record of bad credit history. These are often called non-conforming loans.
The amount you could borrow would depend on your ability to make the payments, your credit standing and the total amount of borrowings (secured by the property) compared to the value of the property. The interest rate usually reflects the perceived risk by the lender. So, if you can provide good financial proof and you retain a good percentage of equity, you would expect a lower interest rate. Higher interest rates would apply where little or no documentation is available or you need to borrow closer to the total value of your property.
For more information on loan types phone 1300 171 351 and talk to one of our consultants.
Debt Agreement.
If you have minimal equity in a property and you are really struggling with your debts and can’t see a way out, then a Debt Agreement may be an option for you. This is a formal arrangement with your creditors, normally made through an administrator that is governed by Commonwealth Government legislation.
The legislation sets out particular conditions and limitations regarding Debt Agreements. The outstanding amount of the debts are negotiated with the creditors by the administrator and can often be reduced. Under a Debt Agreement your property is protected from unsecured creditors.
For further information, see Debt Agreements.
Debt consolidation can provide more certainty and relief when you are having difficulty administering your debts. It is important though to ensure that the new arrangement is within your means to pay. Be aware that fees and charges may have increased your debt. But don’t forget that the main benefit is having a manageable payment over a longer term.
Equally important is to ensure that no further debts are added to the load. To keep a good hold on your financial management, a budget is a good place to start if you don’t have one.
Debt Consolidation Calculator
If your consolidering debt consolidation we have developed a calculator to assist you.
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