What you need to know about debt consolidation
This article is part of a fictional case study series following "Sarah", a typical first home buyer in Victoria. Read each article to follow "Sarah" through a variety of articles exploring issues related to buying a home.
Sarah was making good progress on her debts and getting them cleared. But after a while she noticed that it was a hassle paying three different debts at once.
That’s the idea behind debt consolidation: it takes several debts and puts them all in one, so you only have to worry about one payment.
It can be a useful tool. Which is why Sarah went to see her bank to inquire about debt consolidation. Here’s what they found:
- Sarah could put three payments into one. With a debt of $10,000, one of $5,000 and another of $5,000, Sarah was wasting hundreds on interest. By putting them all in one loan at a competitive rate lower than the individual rates on each debt, she was able to save several hundred dollars a year. That’s money she can put towards paying that debt off faster.
- Sarah simplified her life. Instead of having to deal with three lenders, she communicated with one.
- Sarah was able to plan her money better. By only having one payment every month, Sarah was able to adjust her budget. She was less likely to miss a payment, and could always plan around it for bigger expenses.
Debt consolidation isn’t a silver bullet. It isn’t going to actually reduce your total amount of debt, but it will generally mean extra interest savings and a much simpler way of dealing with it. Just remember:
- You’ll still need to diligently make extra repayments to get rid of it faster.
- It shouldn’t stop you from saving money! Don’t put your foot on the brakes – keep saving, and saving hard.
Consolidating isn't going to get rid of Sarah's debts, but it might help her get rid of them faster - as long as she doesn't stop paying them off aggressively.