What other options are available to me?
While debt consolidation is an option that suits many people, there are other options and avenues open to you that you may not have even considered. Accordingly, before you jump straight into debt consolidation look at whether any of these options might better suit your needs:
- Negotiate a repayment plan with your credit provider. No credit provider wants to see a client default on their debt. You might be surprised how willing they are to talk with you about a repayment plan that meets their needs and does not place you in financial hardship,
- Changing from one home loan to another. While this can see you lowering your monthly repayments, changing loans can incur fees to set up the new loan, and penalties for paying out another loan early, so you do want to check the fine print before you sign any new contract.
- Make an appointment with the Department of Human Services or a not for profit community organisation who provides free financial counselling. These organisations have expert financial counsellors available to help you create budgets so that you can reduce your experiences, create savings plans so that you can put some money away for unexpected expenses, and provide support in negotiating your debts with your creditors.
Things to consider before debt consolidation
If you are seriously looking at using debt consolidation as an efficient way to manage your finances and monthly repayments, here’s what you need to know:
- Make sure that you can meet the monthly repayment cost for a consolidated debt first of all as you don’t want to find yourself getting deeper into debt. You will also want to take into consideration any payout costs you might have to make on existing loans to make sure that paying them doesn’t make the debt consolidation process cost more than it’s worth. If you do end up making repayments on a consolidated debt, you might find you actually have more available credit. In this case, make sure you don’t go into more debt!
- Compare all of your current costs with the costs you’d make for a consolidated loan. If your existing costs are higher than debt consolidation is a good option for you. Make sure you include all costs in this comparison, including fees, interest rates and exit costs.
- Be careful about signing up for a debt consolidation loan that transfers all of your unsecured existing debts into a secured loan that uses your home as security for the new loan. Should you find yourself having difficulty making the repayments it is entirely possible that
- Make sure you check on whether there are any early repayment penalties for paying out existing loans. Include this when you compare your current costs with your costs on a debt consolidation plan.
- You need to be careful when engaging with lenders that make unrealistic promises by advertising that it doesn’t matter what level of debt you have or what income you generate. There are, sadly, unlicensed lenders that make all sorts of promises and will sign you up to complex contracts that are heavily weighted in their favour and are riddled with fees and charged.
- To ensure you use a reputable lender, it is important that you use a broker and / or institution that is licensed with the Australian Securities & Investment Commission. You can check their license by conducting a search on ASIC Professional Register or by contacting them by phone.
Making debt consolidation work have real long term benefits
In order to optimise the benefits that you can obtain as a result of taking out a debt consolidation loan, you should follow these simple steps:
- Create a debt management plan which will help you to identify how much you can afford to pay each debtor, when those payments are due, and track the progress of each debt in being paid day to zero dollars. A debt management plan also provides valuable information for your budget so you can see at a glance what your debt obligations are each time you get paid.
- Create a budget so that you know what your costs of living are each pay period. By documenting your outgoings you can identify areas where you can make savings by reducing expenses. Having a budget in place, and working in concert with a debt management plans, as debts are reduced you will eventually be able to start putting money away into a savings account.
- Should you find that you have reduced expenses and have a little extra money available each pay period, consider making additional repayments (if you won’t be penalised for doing so).
Commonly Asked Questions
You might find that there is some resistance from your bank or other financial institution regarding your debt consolidation options, so here are some answers to commonly asked questions to help you decide if debt consolation is for you and how to pursue a debt consolidation loan: