Chris Childs

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Debt Consolidation: Friend or Foe?

Many of us cringe when we think about debt. It either feels too hard to face or we’re ashamed of how much we’ve accrued.

Debt can feel massively overwhelming as it hits us from all angles; there are credit cards, mortgages, car loans and GEM cards to repay…Many retailers even have their own private in-store loan systems these days.Yet the reality is that you are not alone in your debt.The average Australian household debt has increased by more than four times since 1988. In these last few decades, the proportion of household debt to disposable income has also increased from 64% to 185%.It’s clear from these recent statistics that many of us are in debt and often quite considerably. So how can we manage our debts without tearing our hair out, missing repayments or paying our lenders more than we need to?We need a savvy debt reduction strategy! Debt consolidation has a negative connotation for some people. However, it can be a savvy financial strategy when you know how to use it correctly.In essence, debt consolidation gives you the freedom to combine all your existing loans into one manageable ‘loan pot’. This eliminates the need to track multiple repayments with differing interest rates and various due dates. Feels easier already, right?How debt consolidation can go wrong…Just like most financial tools, the outcome will also depend on the user. (That’s you!)Initially, consolidating debt can feel like a massive relief. Just imagine it – no more maxed out credit cards or phone calls from the debt collectors, a big weight off the shoulders…All you’ve got to focus on now is one, easy consolidated repayment.However, if you slip into old spending patterns and money traps, you’ll find yourself right back at Square One. Consolidating old debt is not intended to help you find new debts.Think of debt consolidation as much more than just an exit strategy from financial stress; it’s a true opportunity to learn new habits, master your money and take control of your financial future!Debt consolidation can save you moneyBy combining various debts into one larger lump sum, you can repay it simply and often at a lower rate of interest. This can save you big bucks in the long term! Let’s take a look at an example…Just imagine that you’ve consolidated the following loans into one debt:
  • A principal and interest home loan ($300,000 – $2,000 per month)
  • One car loan ($20,000 – $533 per month)
  • Credit card ($5,000 – $200 per month)
The home loan would require 25 years to pay off, the car loan would require five years and the credit card providing you never use it again – would take a grand total of two years and four months to get down to zero.Compare that to your scenario after doing debt consolidation:
  • Realistically, you may be charged $5,000 for setting up fees
  • A wisely selected interest-only loan (5%) would reduce your monthly repayments from $2,433 to $1,354 (a massive saving already!)
But here’s the really exciting news! For argument’s sake, let’s imagine that you kept your repayments the same as before…
  • After 12 months, your debt has dropped to $317,000
  • In just two years and four months, you’ll have paid off your car and credit card
In fact, the entire loan could be paid off in just 12 years! You’ve effectively made your debt much more manageable by consolidating everything into one easy payment and more than halved the repayment period.Debt consolidation: Definitely friend, not foe, when used correctly. This is one of many strategies our Think Money mentors can show you. For more expert advice to make your finances so much easier, get in touch with us today!