What is debt consolidation?
Debt consolidation allows people to merge multiple existing debts – such as credit cards, personal loans and hire purchases – into a single loan.
No more juggling of numerous interest rates, repayment schedules and amounts with different creditors; debt consolidation simplifies these into one interest rate, one repayment schedule, and one creditor.
The benefits of debt consolidation
If you feel like you’ve barely made a dent in your credit card debt, you’re probably right. Why? Interest.co.nz might just have hit the nail on the head with their explanation of it. In their example, with the minimum repayments on a standard credit card, it could take up to 60 years to pay off just $2,000 – in which time the interest you pay would more than quadruple the amount of the original charge.
If you’re sick of running on the debt treadmill, and want to simplify your bills and pay your existing debt off faster, then debt consolidation could work for you.
What’s the best way to know? Do the math. Sorted.org in NZ, and MoneySmart in Australia, both have great debt calculators where you can note down how much you owe along with interest rates, the repayment amount and frequency. It’ll tell you how much you’ll be paying in interest, and how long it’ll take to pay the debts off.
As a bonus, it will also tell you how much you could save (both in time and money) if you increase your payment amounts.
Here’s an example.
Jason has a standard credit card at a well-known bank, with a $10,000 balance at 19.95% interest. He also has a low rate card at another bank, with a $4,000 balance at an interest rate of 13.9%.
If Jason only makes the minimum repayments, it could take him almost 15 years to pay off the $4k card, and 25 years to pay off the $10k card. That’s a long time – and a lot of interest – to spend on a credit card purchase.
Knowing this, Jason decides he wants to have each card paid off in 36 months, in which case he’d need to increase his monthly repayments to $509 a month. At the end of the 36 months, he would have paid over $4,000 in interest – much less than he would if he spread it out over 25 years.
But he could save even more if he moved his debt somewhere he could pay less interest.
Luckily, Jason has a good credit history and meets the criteria for a debt consolidation personal loan at an interest rate of 13.84% – lower than the rate on both of his cards. By meeting the minimum monthly payments on a 36-month debt consolidation loan, he saves around $1,000 on interest.
Because Harmoney doesn’t charge any early payment penalties, John could increase his monthly payments and aim to pay off the loan in 30 months, saving even more.
Get off the debt treadmill – and stay off.
It’s important to remember that debt consolidation isn’t a cure all.
If you’re looking at debt consolidation to clear up credit card “overspending”, the most important thing to do is cancel your cards, or restrict the way you use them and pay them off in full every month when you do.
Think of a debt consolidation personal loan like a nicotine patch – lessening temptation by giving you the chance to ditch the cards – it’ll help, but only if you put in the effort too.
Keeping your finances focused is another crucial step in getting out of debt. Got a budget? If you don’t, then make one! Budgeting is key to making your finances work. Knowing your regular outgoings and separating the wants and the needs will help you assess what you can and can’t afford – and if you can afford to pay more than the monthly minimum on any of your debts, it could save you hundreds, or even thousands.
Put a fixed date on being debt free.
Find out how much you could save by consolidating your debt with a Harmoney personal loan.