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Debt Consolidation

Debt consolidation is when you have more than one loan or credit facility and you combine it into one loan to help you better manage your financial situation. Common ways you can do this is by applying for a personal loan, credit card or an equity release through a home loan.

How does Debt consolidation work?

You can apply for a new personal loan, credit card with the limit you need to pay out the existing debts or apply for an equity release home loan. The new loan or credit card will pay out each of the existing debts for the facilities to be closed. Once this is all done, you now have one consolidated debt and one ongoing repayment. In addition, you may be able to lower your ongoing repayments as you can choose the term of the loan to help with your cashflow.

What are the benefits of doing a debt consolidation?

  • Potentially lower interest rates
  • Lower ongoing repayments
  • Single set of ongoing repayments that makes it easier to manage
  • Flexibility in choosing the term to finish paying off the new loan

An example of a Debt consolidation

You have a car loan owing $15,000 at a rate of 9%, a personal loan of $20,000 at a rate of 12% and a credit card debt owing $12,000 at a rate of 22%. Each of these debts would have their own set of ongoing repayments each month.

You apply for an equity release home loan with a rate of 6.14% with a loan amount of $47,000 to payout each of the existing debts. This allows you to just have one set of ongoing repayments based on the term you set giving you greater control and giving you a clearer goal and timeframe on when you will finish paying off the loan.

What you should consider of be aware of

  • You may end up paying more in interest charges if you set the loan term to a longer period to reduce your ongoing monthly repayments
  • You may pay a higher interest rate based on your credit score and financial profile
  • There may be high upfront costs such as annual fees, closing fees, break costs and establishment fees
  • You can get into a bigger debt cycle if you cannot meet the ongoing repayments in the future.

FAQs

What kind of debts can I consolidate?

Combination of debts such as credit cards, personal loans and car loans.

Can I choose between a fixed rate or variable rate for the debt consolidation loan?

Absolutely, both options are available on debt consolidation loans.

Can I make additional repayments?

If you are on a variable rate option, you can make unlimited extra repayments and this will help you save on the overall interest charges and help you finish paying off the loan sooner.

On a fixed rate option, there may be break costs if you make extra repayments above the maximum limit.

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