Struggling under bills? How debt consolidation can help
Debt consolidation can alleviate stress and save you money - if you get it right.
Paying off multiple debts can be stressful. You can find yourself thinking about it all the time, counting the days until the next bill and wondering how long it's going to be before you're back in the black.
But there is an effective way to alleviate that stress and simplify your payment schedule – bring all your debts under 1 umbrella. Otherwise known as debt consolidation.
While it's not a cure-all, debt consolidation has some major benefits. Let's take a look.
It can save you money
Let's say you have $20,000 in credit card debt, spread across multiple cards. According to the Australian Bureau of Statistics, the average interest rate for credit cards is 19.94% p.a. That means if you paid your credit card off over 5 years, you'd have spent an extra $11,759 on interest alone. That's before we even look at annual fees.
But there are a couple of options that could save you money. You could either take out a personal loan to pay off your debt, or you could move the debt to a balance-transfer credit card.
Let's look at personal loans first. Personal loans typically have lower interest rates than credit cards and are better suited for larger debts that will be repaid over a longer time frame.
For example, digital lender NOW Finance offers unsecured loans with an interest rate starting from 5.95% p.a*. for borrowers with excellent credit.
If you were eligible for that interest rate, and you paid the $20,000 off over 5 years, you'd only pay $3,171 in interest. Plus, NOW Finance doesn't charge any fees either. That's a potential saving of over $9,000.
On the other hand, you could move your debts over to a credit card with 0% interest on balance transfers for a set time period. If you were able to pay your debts off within the introductory period, you wouldn't pay any interest at all.
The longest introductory periods in the market are currently 36 months so if you paid three fifths of your $20,000 debt off in that period, you'd still have $8,000 to pay. Over two years at an interest rate of 19.94% p.a., that's still going to cost $4,415 in interest alone.
However, some balance transfer credit cards charge annual fees that you have to watch out for and some only let you transfer credit card debt. Other cards do let you transfer personal loan balances as well, but if you have other forms of debt, such as unpaid medical fees, unpaid utility bills or a buy now pay later balance, you won't be able to cover it.
You can clear your debts quicker
If you consolidate all of your debts into 1 account with a lower interest rate, but keep paying the same monthly repayments, you can pay your debt off sooner.
Let's say you have a $10,000 car loan with a 7% p.a. interest rate and you're paying $400 a month towards clearing the debt. You also have a $5,000 credit card debt with a 19.94% p.a. interest rate. And you're paying $200 a month towards clearing that debt.
Overall, that means you're servicing a $15,000 debt with an average interest rate of 13.47% p.a. and you're paying a total of $600 a month. (Again, this doesn't take fees into account, but we'll use this as a hypothetical.) To clear both debts, it would take 29.51 months.
However, if you took out a personal loan with a lower interest rate, you could pay it off sooner. Let's use NOW Finance's personal loan as an example again, assuming you're eligible for the 5.95% p.a. interest rate (comparison 5.95% p.a.*) for borrowers with excellent credit. Again, there are no fees to take into account.
If you moved your $15,000 debt over, but continued paying $600 a month, you could clear your debts off almost 3 months sooner than in the situation described above. That means you've also saved close to $1,800.
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It could reduce your monthly repayments
On the flip side, if you're struggling under your monthly repayments, consolidating your debt can give you the opportunity to lower your outgoings while still repaying your debt.
Let's stick with the example above. $600 is a lot of money every month. If you moved your $15,000 debt over to a personal loan, you could apply for a loan with a longer repayment period.
Let's say you took out that same personal loan with an interest rate of 5.95% p.a., but you extended the loan term to 5 years. Suddenly, your monthly repayments are just $289.
Be aware though, if you increase the length of your loan, you will pay more interest. Over 5 years, you would pay $2,378 in interest while you would pay $947 in interest over a 2-year period.
It can be less stressful
I don't know about you, but having just 1 bill to think about every month is far less stressful than having 3, 4 or 5.
Instead of feeling that moment of dread multiple times a month, you'll have it under control. You've got this.
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It can improve your credit
Although it's not guaranteed, debt consolidation can make it easier to manage your finances and reduce the chance of you missing a payment.
Let's say you have a rough month, your car needs urgent repairs, you paid for medical expenses and maybe you just generally overspent. If you can't meet your repayments, you have to contact all the different lenders, request an extension, possibly incur a late fee and potentially have it recorded on your credit score.
However, if you just have 1 lender to work with, things are suddenly much easier. You're only requesting 1 extension and you don't suddenly have multiple debts piling up next month.
In turn, this can improve your credit score. There's less chance of you missing a payment, which means there's less chance your credit score will be impacted. With a healthier credit score, you might even be eligible for a lower interest rate if you ever need to refinance or take a loan out again in future.
Learn more about debt consolidation loans from NOW Finance
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.