Thinking about consolidating your debts? There is a bit to consider

You’re struggling to meet your obligations. Bills are piling up and you haven’t been able to get that credit card debt down. You should consolidate your debts… right?
 

Maybe, but not without checking the details carefully.

Here’s an example of what to look out for:

Let’s say you owe $1,750 in utility bills, have a $4,500 credit card debt (at 19% p.a.) and pay $909 per month on a 15 year, $100,000 home loan (fixed for 5 years at 7% p.a.).

You are offered a debt consolidation deal that will look after your bills and credit card, at an interest rate of only 6%, where you will only pay $854 per month. Looks good, right?… a lower interest rate, and no more credit card or utility debt, and lower repayments.
 

But is it too good to be true?

On your current home loan you would pay $63,589 interest over the next 20 years and if you paid your utility bills with your credit card and took 5 years to pay it off at $162 per month, you’d pay $3,478 interest, so your repayments (including bills, credit card and loan principal) would total $173,317.

When you consolidate, your existing lender charges $5,000 to break the fixed rate component of your loan, and fees from the debt consolidation company and the new lender total $6,500. Including these fees, your total indebtedness has increased from $106,250 to $117,750 and your loan has been stretched to 20 years to lower your monthly repayments.

Now your repayments will total $204,863, which is $31,546 worse off, and you will take an extra 5 years to get out of debt.
You may still decide it’s worth doing, but at least you’ll know what you’re in for. The question is, do you have any alternatives?
Yes. Here are some suggestions.
 

The Alternatives

1. Talk first – most utility providers have hardship policies and will help you with a payment plan.

2. Consider switching to a low rate credit card, especially if you can find one offering an especially low introductory offer. (If you do, it may be a good idea to destroy your old card so you aren’t tempted to use both and run up more debt).

3. Take control of your budget. If you skip that morning coffee and take lunch in to work, can you find $40 per week? In the example above, if you switched to an 11% p.a. credit card, the $40 per week ($170 per month) would be enough to pay off your credit card in 5 years (at $100 per month) and leave you $70 per month to pay off the utility bills (which would take two years)… and save you over $30,000 compared to the debt consolidation.

4. Ask for help, offered by community legal centres and government agencies. Call the free Financial Counselling Hotline on 1800 007 007 (9:30am to 4pm, Monday to Friday).
5. If you have tried to negotiate with your credit provider and you think they are being unfair, you can contact a free external dispute resolution scheme. Your lender must tell you which one of these two schemes it belongs to:
   • Financial Ombudsman Service (FOS) – 1300 780 808
   • Credit and Investments Ombudsman (CIO) – 1800 138 422

If you decide to go ahead with debt consolidation;

• Check they’re licensed by ASIC. Search at ASIC Connect’s Professional Registers, or phone ASIC on 1300 300 630.
• Make sure you understand the fees, interest and total repayments you are being offered.
• Check that you’re not being offered a “Part 9 Agreement”, sometimes just called a “Debt Agreement”. If you are, make sure you get independent legal advice first.

Free legal advice is available if you are not able to afford a private solicitor. For more information, go to moneysmart.gov.au/managing-your-money/managing-debts/free-legal-advice

What are your thoughts?

Are your debts in need of a little management? Are you considering consolidating? Is there anything else you’d like to know about managing your debts?
Join the conversation — leave a comment below and let us know what you’re thoughts are.