When to Consolidate Your Debt and When to Avoid Consolidation

Debt consolidation can offer financial relief to those that are struggling to manage multiple debts. With a debt consolidation loan, you can combine your debts into a single loan.

Instead of dealing with multiple monthly debt payments, you have a single payment. You may also end up paying less interest on some of these debts, making debt consolidation a useful option for many Australians. However, there are also times when debt consolidation is not the most suitable choice. For people struggling with debt, there are websites with information from the government.

Here are some tips to help you decide whether debt consolidation is the right solution.

Search for a Lower Interest Rate

Before applying for a debt consolidation loan, you should pay attention to the interest rate. For debt consolidation to be an effective strategy, the interest rate on the consolidation loan needs to be lower than the interest rates on your outstanding debt. There are a host of financial tools and calculators to help you online.

Create a Financial Plan to Avoid More Debt

A debt consolidation loan will be little help if you instantly begin adding to your debt again. It is recommended that you create a financial plan that includes a budget for your debt consolidation loan, home loan, and all other expenses.

You also need to have enough cash flow to cover the cost of the debt consolidation loan repayments. Typically, lenders will advise against debt consolidation if your total debt exceeds half of your total income.

Consider Alternatives to Debt Consolidation

For those that have significant debt that exceeds half of their income, there may be other solutions. If your debt is too high, the debt consolidation loan repayments may still be too much for you to afford each month.

There are many different debt relief programs available in Australia. You should also consider contacting your debtors to determine if you can restructure your repayment plan.

Many lenders and creditors are willing to work with consumers to lower their monthly repayments by adjusting the length of the loan or applying a lower interest rate for a fixed period. These solutions may provide a more viable option for those who cannot afford monthly repayments on a consolidated loan.

Pay Off Your Existing Debt on Your Own

Along with those who have significant debt, those with a small amount of debt may want to avoid debt consolidation. If you can safely pay off your remaining debt within the next six months or year, a debt consolidation loan may not provide any substantial savings.

Instead of applying for a debt consolidation loan, you can pay off your debt and avoid losing any equity in your property.

Calculate Your Debt Consolidation Savings

If you want to estimate your potential savings with a debt consolidation loan, you should use a debt consolidation calculator. After entering the value, interest rate, and current repayment of your existing home loan, along with the details of your debts, you can estimate your potential minimum repayments.

Use the debt consolidation calculator, along with the tips discussed, to determine if consolidating your debt is a wise decision.