Debt consolidation – the pros & cons, and alternatives
What are the pros and cons of debt consolidation, the good and bad and alternatives? Feel like you’re drowning in debt and considering a debt consolidation? You’re not alone – in fact, Australia’s personal debt is some of the highest in the world.
For too many of us, the answer to getting by financially is to load up the credit card, and when that’s reached its limit, to go out and get another one. Add to that the car loan, escalating electricity prices, the cost of paying your rent or mortgage and putting food on the table, and your financial situation can become pretty ominous.
For many people, the solution to mounting debt across multiple cards, bills and personal loans is a debt consolidation of everything into one new loan to cover the lot. In essence, it’s using one debt to pay for all of the others. There are pros and cons with this debt solution approach, and it may be a good idea to seek some professional advice before you leap into it.
- Once you do debt consolidation, you then have a single debt to focus on, with regular payments reducing the total amount owing – so you don’t need to worry about paying smaller amounts throughout the month to multiple creditors.
- You may end up with a lower interest rate, especially if you’re paying hefty rates on your credit card balance.
- You’ll probably end up paying less each month because you’re benefiting from that lower interest rate.
- If your existing credit record is bad you might not be able to get a new debt consolidation loan
- There is the potential to rack up more debt if you’re not careful. Since your debt repayments are probably going to be lower, you’ll have a little extra cash to spend and it was that spending that got you into trouble in the first place right?
- You will still be paying interest on the debt, although likely lower interest, and lower payments are great but if you don’t discipline yourself to pay off the debt as quickly as possible you may find it draws out for many years and you end up paying more than you would have.
Alternatives to debt consolidation
If you’re in financial hot water with unmanageable debt and you can’t get a consolidation loan, or you just think it’s not right for you, there is another solution – a debt agreement. This is a legally binding agreement between you and your creditors that is set up by a debt administrator. The debt administrator works with your creditors to negotiate the amount you can afford to pay over time, and then you make repayments directly to the administrator. It’s the administrator’s job to then split the payment up and pay your creditors who are part of the debt agreement.
This form of agreement is similar in some ways to a consolidation loan because you only make one payment each week or fortnight – so you don’t need to worry about who needs to get paid and by when.
There are a few key points to know about when it comes to debt agreements:
- It’s suitable if you have unmanageable debts – think of it as the option before bankruptcy, a way to protect your assets.
- The debt agreement is regulated by the AFSA under Part IX of the bankruptcy act (but is itself not a bankruptcy). It guards you against any further legal action including bankruptcy during the agreement for the debts that are included.
- The Debt Administrator can often negotiate a debt reduction amount with your creditors so that your repayments are realistically affordable.
- When your debt agreement is accepted by your creditors, your debts are frozen and no further interest is added to them – so they’ll stop growing. This provides you with a realistic pathway out of debt.
Where to get help
If your debt has become overwhelming and unmanageable, we’re here to help. Safe Debt Management has helped Australians from all walks of life recover from their financial crisis by stepping in to arrange a Debt Agreement with their creditors. We deal directly with the businesses you owe money to, so you don’t need to have those awkward conversations any longer, and we take care of all of the paperwork for you.
Find out how we can help you control your debt and make your life better. Get in touch today for a free debt assessment – you’ve got nothing to lose but your debt.