Debt Consolidation
Consolidating your debt can get you back on track
Are your short term debts getting on top of you? Consolidating into one loan can simplify your payments and could save you on interest. Even if you are managing the payments, there still may be ways to reduce both your regular repayments and interest cots incurred.
Why Consolidate
Secured
Unsecured
Risks & Costs
Why Consolidate
Short term debts are often high interest and over short terms. This makes the repayment obligations hard to manage. When you add multiple loans and credit cards into the mix the repayments get even more challenging. A consolidation can help clear this up and give you a single and hopefully lower repayment.
Save on Interest
With short term loans, there is often no security or a vehicle as security. To cover the risk of this the lender will need to charge a high interest rate. Credit cards are a convenient solution but when the balance grows the interest, often around 20% can get hard to clear. Some personal loan providers will offer lower interest rates, especially if you can provide security through housing or vehicles.
Easier to Manage Payments
With more than 1 regular payment it can be hard to keep track of payments and when they are due. Credit cards charge interest but with no regular repayments required that often means the interest is paid but the balance never actually reduces. Combining this into 1 can give you a single loan to budget for and work on paying down.
Loan Term Review
Outside of a lower interest rate, extending the loan term of the consolidated loans can lower repayments. This may mean you pay more in interest so it is important to weigh up the risks. If you have multiple loans then they can be on different terms which makes future planning harder as well. Combining them into a single loan gives you a single timeframe to work towards.
Secured Options
By providing security to the lending, the lenders risk is reduced so the interest rates you get access to can come down. This does risk the asset you are securing the loan against so it is important to weigh up your budget and the risks of using the asset.
Adding into your mortgage
Adding the debt onto your home loan can be a scary thought becuase home loan terms can exceed out to 30 years and it eats into the equity in your home. But the benefit is that you get access to residential rates which will likely be significantly lower than personal loan rates. You would need to have enough equity and be able to meet the banks assessment criteria. Depending on your position there may be room to take the lending over a short term similar to what the loans are currently on but with the benefit of housing interest rates. Adding liability against your home should be considered along with the cost of the loan over its full term.
Vehicle Security
If you have short term debt that is unsecured or credit card debt then using a vehicle as security can get provide the lender with less risk and hopefully lower rates. This won't be as low as housing lending but there is less risk to your main home. The loan term options will also be more limited, usually to a maximum of 7 years. How much lending you can access will depend on the value of your vehicle.
Second Mortgage
If you have equity in your home but your existing lender hasn't approved the consolidation, there are still other options. A second mortgage is when another lender uses your property as security but the legal interest they have is only second to your main banks claim. This means you can keep the rest of your home loan with your existing lender but still use your equity to consolidate any other debt. This will likely be higher interest than a standard housing loan and you should again consider adding liability onto your house.
Unsecured Options
If you don't have a vehicle or house you can use as security, there can still be some options to consolidate with another lender. Not all personal loan providers are the same and there could be a better option out there to clean everything into one.
Still high payments
To account for the risk of not having anything to secure the loan the interest rates available will likely still be high. A big factor in what rate is offered is your overall position. One of the leading indicators into your interest rate will be your credit history and how you have been managing the debts currently. If you have been on top of payments and keeping your accounts positive then you can get access to more attractive rates.
Short Term & Lower Limits
Without any security, the lender is taking on more risk so the amount they can provide is limited. This limit tends to be around $50,000. The loan terms are also usually shorter than what housing and vehicle secured loans could offer. Unsecured options can still be beneficial, especially for credit card debt which has no consistent repayments and high interest.
Risks & Costs
Consolidating debt doesn't come without risks, especially when including an asset as security. These should be considered before you go through with the consolidation.
Liability against an asset
If you default on an unsecured loan, it impacts your credit history and ability to access future lending. But if there is security attached then the lender has the right to force a sale of that asset in order to get the loan repaid. Changes to your position can happen at any time so although you may be able to manage now, if you affordability gets harder in the future then the asset is at risk.
Interest Rates
The interest rates may still be high and although you are aiming to consolidate into one loan, if you were to take out additional lending then you are putting further strain on your budget.
Understand all associated costs
A consolidation can help you get back on track but it needs to be managed carefully. Some lenders may charge additional fees like balloon payments which is a large lump sum at the end of the loan, or exit costs if you are able to repay the loan early. There may also be one off set up costs when the loan is taken out so make sure you understand all that will be charged.