If you’ve crunched the numbers and have found a debt consolidation strategy that will definitely save you money on interest charges, there are just a few more things to consider before you take the plunge and fall for hidden debt consolidation traps.
Protect your home
If you’re planning to consolidate your debt by folding it into your home loan, remember that all of your debt will then be secured by your home. This means that if you are unable to keep up repayments for whatever reason, you risk losing your home – all for the sake of a few thousand dollars on a credit card. If you keep your credit card or personal loan separate, the debts remain unsecured and won’t affect your home. This is one of the biggest debt consolidation traps that individuals fail to realise.
Combining your debts in a home loan may also mean that you’re not eligible for help in the future if you fall on hard times. Lenders’ hardship programs exist to allow borrowers to request a change to their repayment schedule in the case of redundancy, illness, or other unforeseen circumstances which make repayments difficult. One important criteria though, if you took out your loan after 1 July 2010, is that only loans of less than $500,000 are eligible for a hardship variation.
If your debt consolidation is going to push your home loan over this limit, it may be best to re-think your options, otherwise you’ll be relying on the goodwill of your lender to help you out if you do hit trouble in the future. If your lender isn’t feeling too philanthropic, they have the right to foreclose on the loan and repossess your home.
Get to the root of the problem
So you’ve got your debt consolidation strategy in place and you’ve even managed to lower your monthly repayments, meaning you’ve got a bit more spare cash each month. But be really honest here; are you going to put the extra money into paying off your debt sooner or are you just going to continue with the bad spending habits that got you into this pickle in the first place?
One thing that debt consolidation doesn’t do is address the underlying issue of poor financial management or irresponsible spending. Once your debt is clear, what’s to stop you celebrating with a big spending spree and maxing out those cards once more?
If it’s overspending or living beyond your means that’s got you into this position in the first place, creating a budget may be the best way to tackle the root of the problem. You can have a go at doing this yourself, or turn to a financial counsellor who can act as your mentor to help you stay on track. To find someone near you who provides this service, check financialcounsellingaustralia.org.au.
Debt consolidation traps to avoid:
- Consolidating your debt into your home loan can put your home at risk if you fall behind with repayments
- Pushing your mortgage value over $500,000 means you won’t be eligible for certain hardship help, if needed
- Take steps to tackle the bad habits that got you into debt in the first place; a budget is a good place to start