Consolidating Debt: A Guide to Your Financial Options
Consolidating debt is a means to an end. If you are struggling with a lot of debt, like millions of Australians, then you realise that something drastic needs to happen.
Consider this situation. A borrower uses his $8000 credit limit and incurs a debt of that amount, at an interest rate of 18 percent. If the minimum monthly repayment on this credit card is $200 and you only pay $200 each month, the real cost of this debt will greatly exceed $8000. To pay off this debt in total, it will take 360 months, which is 30 years! It will cost the individual a total of $11,615.32 in interest. Borrowing that $8000 has become very costly, then. If you look further, you will notice just what the problem is. When you make a minimum payment of $200, $120 of that goes towards interest. The principle on the loan goes down by only $80 so the next month you still owe $7920.
What does all of this mean to someone looking to get out of debt? It shows that it is nearly impossible to make minimum repayments and hope for the best. Rather steps have to be taken to find other methods to clear your debt, such as consolidating your loans. So how can you consolidate?
How does it work?
The idea is simple all of your unsecured debts are put into one loan. That means you have only one loan to repay each month, which means it is just one loan payment to budget for and to remember to pay. In addition to this a consolidation loan may enable you to pay more at one time towards that loan, paying it off faster. You may also be able to secure a lower interest rate and repayment plan, freeing up more cash for your budget.
The key to consolidation loans is qualifying for them and using them correctly. To get a loan that will be large enough to allow you to pay off other debts, you will need to consider one of these options.
- A home equity line of credit, which is one of the best choices in terms of affordability (home equity loans are often much lower in interest rates than credit cards.) The only downfall of this option is that you are putting your home's value at stake for your unsecured debts
- A personal loan, which is unsecured, but can pay out all of your credit card and other high interest debt.
Once you get the right type of consolidation loan for yourself the next step is to use it wisely. One of the worst things you can do for yourself is to pay off all of your credit cards with a new loan to consolidate them and then use those credit cards all over again. For some, this may mean getting rid of the other credit cards while for others it simply means not using them.
When Loans Do Not Work
Many people who need consolidation loans have an impaired credit report and as a consequence will not be eligible for a loan. For others, they are behind in their repayments and are struggling to make minimum payments. In this situation, getting a new loan can be very difficult. Another option is to contact a debt agreement administrator who can assist you in coming to an arrangement with your creditors. This is not a debt consolidation loan, rather this type of arrangement is called a debt agreement.
Fox Symes is the largest provider of debt solutions to individuals and businesses in Australia. Fox Symes helps over 100,000 Australians each year resolve their debt and take financial control.
If you would like to find out more about a personal loan or a debt consolidation loan contact us on 1300 361 204or fill out the short contact form.