If you are struggling with your debts it may be a good idea to consider debt consolidation. Debt consolidation involves taking out a single loan to pay off your other debts. This can be beneficial since all your debts are in the one place and you will only have to worry about repaying one debt, opposed to many due at different times and at different rates. Another potential benefit of debt consolidation is that you may be able to secure a lower interest rate than what you already have, thus reducing your overall payment and allowing you to be debt free in less time.
Many of us have a variety of loans and debts to pay, such as a home loan, a car loan, money owed on the credit card, store finance for the TV and so on. Usually each of these will have different account fees, interest rates, and due dates for payment; generally you will be paying more interest on all of these combined, than if you had one single debt to pay off. Debt consolidation is also helpful since it takes away the stress and confusion of multiple debts. In order to reduce debt quickly, try to reduce the interest rate and fees being charged, while continuing with the same amount of repayment as before; this is because less interest is being paid, so more of the payment is reducing the debt itself (and in turn lowering the amount of interest paid).
Be wary of credit cards and other credit options available. Whilst some cards will have rewards and loyalty programs, the benefits usually won’t compensate for the differences in interest charges, fees and interest-free days. Loans and store finance interest rates vary much the same as credit cards. Many places will offer interest-free loans or credit as a way to entice you in, however always read the fine print since it will almost always require the debt is cleared within a designated time frame.
A balance transfer is where you apply for a new credit card and then transfer the debts from your other credit cards onto the one card. This can be beneficial, providing that the new account has a lower interest rate. As mentioned above, some cards may offer interest free for a designated amount of time; if you are able to pay this debt back within the time frame then it is a good idea to take advantage of this deal and get your debts paid back interest free. This can also be a good motivator to pay debts on time! A balance transfer is a good short term solution but generally not ideal for a long term debt consolidation since interest rates can rise quickly and it does not help you pay back non-credit card debts.
A smart way to consolidate your debts is through a home loan. The recent reductions in interest rates on many home loans have especially made this the case since people can halve their average interest rates. For example you could refinance a credit card at 18% to a mortgage rate of around 7.7%. On a debt of $10,000 this represents a reduction in interest of around $1,100 per annum.
When consolidating your debts it is important to be aware of the following things:
• Cut up your old credit cards and cancel your old debts! Once you have consolidated your debts and transferred them to a single loan, don’t risk building a separate debt up again. Get rid of them straight away to reduce the temptation.
• Be aware of early repayment costs with your existing loans. You may incur a penalty if it is paid out too early, which can counteract the benefits of consolidating debts in the first place.
• Loan top ups and refinancing will incur some costs.
• Using a home loan to consolidate your debts means that you are converting “unsecured” debt into “secured” debt. If you become unable to pay the home loan, this means your home will be at risk.
If you are looking at getting a credit card for the first time and think you may be at risk of over spending then it may be a better option for you to get a debit card. Debit cards work the same as credit cards except you use your own money and don’t run the risk of any debts. However, if it is too late for debit cards the experienced team of accountants, lawyers and financial planners here at The Quinn Group can assist you with all of your debt needs. There are a number of options to avoid bankruptcy; whether this be debt consolidation, managing your accounts, creating a budget to avoid debts or even some basic monetary advice. For more information submit an online enquiry or call us on 1300 QUINNS (784 667) or on +61 2 9223 9166 to book an appointment.