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Debt Consolidation

Are you currently feeling swamped with personal debt and trying to keep up with multiple personal loan and credit card payments?

Debt consolidation involves taking out one large debt to pay out several old smaller debts, which would then be closed. An unsecured personal loan is what most people associate with debt consolidation. This is ideal where you have several short-term, high-interest debts (e.g. credit card debts, payday loans and overdue bills). The main benefits are a lower interest rate, and the convenience of one payment. Credit cards have very high interest rates, meaning that you could end up paying double or even triple the original sum. Unsecured debt consolidation loans typically have lower interest, with a set time frame.

Debt consolidation can help reduce the stress of multiple debts and interest rates. We explain how it typically works.

Debt consolidation is bringing all your existing debts together into one new debt, which can help you manage your repayments and give you a clearer picture of your financial future. You typically do this by taking out a new personal loan to repay your other existing debts, and then paying this new loan back over a set term.

How does debt consolidation work?

If you have three different credit cards with debts of, for example:$2,000, $6,000 and $6,500, you’re likely to also have three different interest rates and to be making three different repayments at different times each month.

This can feel overwhelming and complicate managing your cash flow. The interest rate on one card may be significantly higher than the others – and if the highest rate is on the card with the $6,500 debt, you could be paying plenty each month just to cover the interest, let alone paying down the debt itself.

One option you have to consolidate your debts is to take out a single personal loan to pay off each credit card and any outstanding interest. With a personal loan you’ll have just one repayment to make every week, fortnight or month over a set term – you can usually choose your own frequency of repayments.

And if the interest rate on the personal loan is lower than your credit card rates – and they often can be – this can help you get ahead in reducing your overall debt.

You can use a personal loan repayment calculator to work out exactly what your repayments will be.

Why would you consolidate?

To summarise, the key advantages of consolidating your debt are:

  • A potentially better (lower) interest rate

  • Repayments that are easier to manage

  • A means of providing a clear timeline outlining when you’ll be debt-free

Taking out a personal loan can also help with your budgeting. Instead of just having to make minimum repayments as you do on credit cards, you’ll have to make set repayments that cover both the loan amount and interest, which you know will end at a certain date.

Debt consolidation is one option in a range of debt solutions. For information on the range of options available, take a look at our Debt Solutions page. You must determine whether the information is appropriate in terms of your particular circumstances.

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