DEBT CONSULTATION
Michelle has been working as an administration assistant in a Legal Firm for a couple of years. She got swept up in the lifestyle of working in big legal firm, suits, new car, drinks after work and holidays.
After 2 years her Credit Card Debt had accumulated to $9,800.00. The interest alone was $2700.00 per year or 10% of her income. She was making all the regular payments but the balance never went down. She successfully applied for a consolidation loan through her bank reducing her interest to $1500.00 per year. She had to increase her repayments but was debt free in 5 years.
What is Debt Consolidation?
There are a number of ways to consolidate debts. The basic idea is to replace some or all of your debts with a single debt and one regular repayment. There are also alternatives to Debt Consolidation that provide similar relief for those people who are ineligible for Consolidation Loans or don't have property with equity to refinance.
Why Consolidate Debts?
A single regular payment is often easier to manage and you only need to have dealings with one entity rather than a number of creditors. You could end up paying less due to a lower interest rate.
What types of Debt Consolidation are available?
Unsecured Personal Loan.
Where your debts have a short term or you have Credit Card Debt or other debts with high interest you may be eligible for Debt Consolidation through an unsecured personal loan. The money from the loan is used to pay out your creditors.
The benefit is that the loan would be over a longer term with a relatively low monthly payment. This allows you to pay off the debt within your budget. If you have credit card debts, although you could pay the minimum each month, the interest is likely to be significantly higher than a personal loan. Depending on the difference in interest rates and the amount of fees, there may be the benefit of an overall saving as well as being able to better manage a regular monthly payment.
Important
- To establish a Debt Consolidation loan you need to show a good financial standing: clean credit and a good repayment history on your current loan. If you are behind with you debts or have a debt with a debt collector your chances of getting a personal loan are very slim.
- Given the current financial markets, Unsecured Personal Loans are becoming increasingly hard to obtain and maximum loan amounts have significantly decreased. Even if you have a clean credit history and a good repayment history don't be surprised if you get turned down.
- There may be exit fees or early exit penalties with your current debts and application fees with the new loan and due to the longer term you may actually end up paying back more than you would have in your current situation.
- A word of caution: if spending is a problem, you need to take care not to incur more debt. This can easily happen after paying off credit cards and consequently having this amount available again to charge on the card.
Secured loan
There are generally 2 options for a Secured Loan - a mortgage where the loan is secured by your home (Discussed in the Mortgage Refinancing Section) or a small loan secured (less than $10 000) by other property for example a car, household furniture or appliances.
There are many large companies with large networks of offices that provide small secured loans and they may be able to assist where banks can't.
Important
- Interest on these loans can be very high and described differently (e.g. 7% per month) and there are fees as well. (Remember interest is generally charged proportionally to risk. While you might not be a higher risk you need to think about the other customers the business serves)
- Security will be taken over your property. In the event of you defaulting on payments they may foreclose on the collateral so you could lose your vehicle, furniture etc.
While Debt Helpline does not provide personal loans we do offer impartial analysis on your financial situation. If you feel that these are a good option for you contact Debt Helpline for a free phone consultation 1300 802 905
Alternatives to Debt Consolidation
Debt Agreement
If you are ineligible for the options above or they won't address your problem (too much debt, bad credit or arrears, no security, etc) and you are really struggling with your debts, a Debt Agreement may be an option for you. It's a formal arrangement with your creditors, generally made through an administrator (e.g. Debt Helpline) which is regulated by the Commonwealth Government (ITSA).
The balances of the debts are negotiated with the creditors by the administrator and the interest frozen. Under a Debt Agreement your property is protected from unsecured creditors. For further information, see Debt Agreements.
Debt consolidation can provide more certainty and relief when you are having difficulty handling your debts. It is important though to ensure that the new arrangement is within your means to pay. Be aware that fees and charges may have increased your debt. But don't forget that the main benefit is having a manageable payment over a longer term. Equally important is to ensure that no further debts are added to the loan. To keep a good hold on your financial management, a budget is a good place to start if you don't have one.