Budgeting and Debt

by ryan on December 26, 2016




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Budgeting: 3 ways to consolidate debts

 

Consolidating your debts could make them a lot easier to deal with. When they ‘roll’ multiple debts into one, a lot of people find that budgeting becomes a much simpler task. Not only that, but it could also help you to reduce your monthly outgoings.

There’s more than one way to consolidate your debts – and here we look at three of the most common methods.

Debt consolidation loan

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As the name suggests, this is a loan taken out for the purpose of consolidating your debts. By paying off several existing debts with your new loan, you’ll be left with just one debt, one monthly payment and one lender.

A lot of people find this makes managing their budget a lot simpler – it can be a lot easier to see where your money is going when you have fewer payments leaving your account each month.

You may also be able to reduce your monthly outgoings by repaying the loan over a longer period of time (than you would have repaid your original debts over). The longer the repayment period, the smaller your monthly payments, but keep in mind that a longer repayment period also means paying more interest in the long run.

To see how a debt consolidation loan could help you, try this useful debt consolidation calculator.

Debt consolidation with a credit card

Consolidating debt with a regular credit card might not be the best idea, as the interest rates tend to be relatively high – but a 0% interest credit card could help you to consolidate your debts and reduce the amount of interest you pay overall.

This is generally only suitable for debts you intend on repaying within a relatively short timeframe, because the interest-free period will be limited (e.g. for 12 months). After that time, interest will be charged, potentially adding a lot to the overall amount you pay.

Debt consolidation with a mortgage

If your mortgage lender will allow you to borrow more than you need to pay off your current mortgage, you may be able to borrow extra to pay off other debts when you remortgage.

One benefit of this is that you’ll effectively be spreading the repayments over the duration of your mortgage. For example, a $10,000 debt to be repaid over five years would cost around $166 a month (plus interest), but consolidating it into a 25-year mortgage would reduce this to around $33 a month (plus interest).

Keep in mind that doing this will reduce the amount of equity you have in your home, and that securing any debt against it can mean you’re putting your home at risk if you can’t keep up with the repayments. And again, repaying the debt over a longer period of time will increase the amount of interest to be paid overall.

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