3 ways to consolidate your debt in 2022
Debt consolidation can bring you peace of mind while saving you money
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Having multiple debts hanging over your head can be overwhelming. It’s not only a bad feeling, but it also makes it harder to pay off.
With multiple repayments and interest rates, it can feel like you’re never really making a dent.
But by consolidating your debt, you will not only feel like the debt is more manageable, you can also pay less in overall fees and charges.
You should consider consolidating your debt if:
- You have multiple debts with different fees
- You’re struggling to make repayments
- You want a cheaper way to pay off your debt
- Keeping track of your debts is confusing
How you consolidate your debt will depend on your individual circumstances, such as how much you owe, the nature of your debt and your financial situation.
In general, here are the options for consolidating your debt:
1. A personal loan
If you have multiple existing debts, consolidating into a single, larger personal loan is a common way to tackle it. Personal loans can be used to consolidate credit card debt, personal loan debt, buy now pay later debt, or even a mixture of all.
A personal loan gives you a little bit more flexibility. You can take longer to pay off the debt compared to a credit card, get personalised rates and you can get higher credit limits.
A single loan is easier to track than several, and you can often find a product with a lower interest rate and fees than all your other combined debt.
If you go to a lender like NOW Finance, there are 2 options for a personal loan to consolidate your debt: secured and unsecured.
Both options have absolutely no fees and can be taken out for a loan term from 18 months to 7 years.
Secured
A secured loan means you use an asset as collateral. This minimises the risk to the lender, meaning you will generally get a lower interest rate and a higher credit limit.
For example, NOW Finance offers secured personal loans, which you can secure against your vehicle, a boat or a caravan. Based on the details of the asset and other financial information, NOW Finance will decide on a personalised interest rate for you.
The interest rate for a secured debt consolidation loan with NOW Finance starts at 1% p.a. lower than the rate for an unsecured loan. To put that into perspective, on a $30,000 loan paid off over 7 years, every 1% p.a. that you save is roughly $1,200.
Unsecured
With an unsecured loan, you won’t use an asset as collateral. While this means there are no risks to your property if you can’t make repayments, it means you’ll be paying a slightly higher interest rate.
You may not be able to borrow as much with this option, but it is popular due to the flexibility and easier approval process that come with unsecured loans.
2. Credit card
A balance transfer credit card is typically used to consolidate credit card debt, but some providers will also allow for paying off personal loan debt or combining the 2.
You will need to make sure the credit card limit is high enough for the amount of debt you want to transfer: balance transfer credit cards usually have limits of between $500 and $8,000.
A positive about balance transfer credit cards is that they usually come with 0% interest for the first 2 years. But note that after the interest-free period the standard rate will apply, which is often above 20%.
One thing to watch out for if you’re transferring debt to a credit card is that you can usually only transfer about 80% of your approved credit limit. This means if you are approved for a credit card with a limit of $10,000 you can only move $8,000 of personal loan debt on to it.
3. Mortgage refinancing
If you have a home loan, you might have the option of taking out a home equity loan to consolidate and pay off your other debt.
This might sound like a convenient option to combine all of your existing debt, but there are things to watch out for. For example, it can be difficult to manage, so think about whether a lack of discipline is one of the reasons you need to consolidate your debt in the first place.
With no loan term to give you a fixed end date, if you don’t pay off the debt quickly you could end up paying more over the long run.
If you decide that mortgage refinancing is the right route for you, you will only pay interest on the amount that you use and not the entire amount made available to you.
Speak to your home loan provider to see whether you can consolidate your debt in this way.
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