Fortunately, there are several ways to manage debt, including debt consolidation and accessing home equity.
Here are some things you need to consider when making a debt management plan that’s right for you.
Work out your debt management plan
Once you have a full picture of your finances, you can begin to look at your debt repayment options. Part of that plan may mean prioritising which debts to pay off first, switching to a cheaper or drawn-down mortgage and combining your debts into one consolidation loan that reduces the interest and fees you’re paying. It may also mean cutting back on non-essential spending.
What are the benefits of consolidating your debts?
Consolidating multiple debts into one loan also provides a timeline of when you can be debt-free and can give you greater control of your budget, by reducing costs such as a lower total interest rate and fewer fees.
If you’re concerned about how your debts are impacting your credit score, consolidating into one loan may be beneficial. While it may initially lower your credit score, over time it will likely improve as it’ll be easier for you to manage your repayments.
However, debt consolidation is not appropriate in all circumstances, so it’s important to consider whether it’s for you.
Considerations when considering debt consolidation
Initially, there may be upfront costs such as balance transfer fees, closing costs and new loan fees and long term you may end up paying more interest overall. When you consolidate your debts into one loan and extend the length of your loan to reduce your monthly repayments, you will end up paying more interest and spending more over the lifespan of the loan.
Debt consolidation and your credit score
You have probably seen your equity rise over recent years, so freeing up that money via a draw-down facility can look like a no-brainer. However, lenders don’t see things that simply. Lenders have to decide if you can manage the larger loan and like to see proof that you are managing your money well. They give just as much weight – maybe even more – to your credit score when deciding if you are a suitable candidate.
Your credit score considers the amount of debt you already have and if you are struggling with existing repayments. It’s a good idea to assess your credit score before applying for a new loan to consolidate your debts and risk getting your loan rejected, as that lowers your rating.