What are the Different Debt Consolidation Methods Available?
Wondering if you should consolidate your debts? There are different debt consolidation methods, each with their own advantages and disadvantages. At the end of the day, the type of method you choose will depend on your personal circumstances. You can download the Mortgage House Debt Consolidation Guide for free. In the meantime let’s look at the three main debt consolidation methods below:
A personal loan, also called a debt consolidation loan when used to consolidate debt, is a simple option to combine multiple debts. This method is quickly available and especially suitable for those who do not own any assets, like a house.
Personal loans are preferred for their fixed term and repayment schedule. A specific amount, usually the sum of total debts consolidated is borrowed. Then regular repayments are calculated so that the loan is paid off within the fixed term. This helps borrowers to budget for repayments and have a clear end date for when they could be debt-free.
While personal loans charge less interest when compared to credit cards and multiple debts, the interest charged on a personal loan is still on the higher side when compared to other debt consolidation methods. A fixed term and repayment schedule may also hinder a borrower from paying off the loan early if their situation changes and they have the funds to do so.
Those with a home loan can refinance their home loan to consolidate debt and get a better deal. This method is especially convenient for those already making regular home loan repayments.
Moving debts into your home loan lets you take advantage of the lowest possible interest rate. Depending on the home loan, you can also take advantage of flexible home loan features that will allow you to make additional repayments, or redraw funds in case of emergency. The term of a home loan is generally much longer than other loans, typically 10-30 years which makes the repayments on your consolidated debts smaller which could help free up your cash flow.
Although a longer term can reduce monthly repayments, paying off debt, according to the lender’s minimum repayment amount, over a longer period, may cost you more in the long run. Effectively consolidating debt with your home loan requires considerable home equity and borrowers should also be sure they can keep up with the extra repayments as defaulting could put your house at risk.
Be aware that this approach turns your unsecured debt into secured debt. This means that if you don’t meet your loan repayments then the bank could sell your home to recover their loan.
Debt can be consolidated with a credit card balance transfer. This method involves transferring all debts onto a credit card with very low or 0% interest. The low or 0% interest is limited to a specified time frame, generally the first 6-12 months.
Consolidating debt with a credit card balance transfer is suitable for those with multiple credit card debts. Transferring to a credit card with low or especially those with 0% interest can provide much needed breathing space to get on top of high interest credit card debts without the added cost of high interest.
A credit card balance transfer requires discipline and some planning to ensure the debt is paid off within the low or 0% interest period. At the end of this period these credit cards often revert to a very high interest rate which can be very dangerous and see one quickly fall back into debt.
Repayments are also set to a minimum, so unlike a personal loan which ensures the debt is paid down to zero within a specified time-frame, outstanding debt may still be quite high at the end of the low or 0% interest period if the recommended repayments are followed without additional repayments.
At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.
But don’t worry, we can help with that.
We can help you combine debt, lower monthly repayments and forget about the stress of multiple bills with a debt consolidation loan or simply add debt to your home loan. You can contact us for advice about the best options for you when it comes to your mortgage.