Debt consolidation can help reduce the stress of multiple debts and interest rates. We explain how it typically works. Paying off more than one debt at a time is not uncommon. But if you’re struggling to balance your debt repayments, debt consolidation may well be worth considering.
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 or refinancing your home loan to repay your other existing debts and then paying this new loan back over a set term.
It’s important to know that applications for finance are subject to credit approval.
How does debt consolidation work?
If you have three different credit cards with debts of, for example, $1,000, $3,000 and $4,500, 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 $4,500 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.
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
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