How to consolidate your debt by refinancing

Without checking your personal records, could you confidently say how many loans and credit cards you have and how much you owe in total? 

On top of that, do you know the due date of each interest payment and the day on which – if you make every payment in full and on time – you will be debt free?

Few of us could do that, but many of us do have debts, big and small, spread over multiple lenders.

Unless you are super-organised, that can get extremely confusing and lead to expensive mistakes.

For example, you may accidentally miss a payment, which will carry a financial penalty and negatively affect your credit rating.

There are good reasons for having more than one credit card. For example, your preferred card may offer you lots of perks, such as frequent-flyer points, airline lounge invitations and shopping discounts, but it is not accepted by every retailer. So, you need another one as a backup.

And credit-cards are excellent options for those of us who can use them responsibly, taking advantage of the interest-free window but paying the debt off in full before it begins to accrue interest.

But it doesn’t always work that way – especially for those people who see their credit limit as a target to achieve rather than as a backstop for a rainy day.

If you carry over debt on your credit card, you are almost certainly paying a very high interest rate – perhaps as high as 20 per cent.

If you are unlikely to be paying off the amount in full anytime soon, then you may want to consider refinancing.

The principle here is that you can roll all your debt – not just the cards, but car and other personal loans – into one “consolidation loan” at a fixed, low rate.

Advantages of a consolidation loan include: 

• It gives you better control of your cash flow. 

• You are dealing with just one bank or financial institution rather than multiple card and loan providers.

• You only make one regular repayment rather than paying different amounts on different days of the month.

• You know when your debt will be fully paid off.

However, there are some potential pitfalls. It may be that the consolidation loan offers no advantage over your current arrangement and could, in fact, mean you will pay more. 

Before you commit:

• Make sure you are dealing with a reputable bank or licenced finance company.
• Don’t be rushed into making a decision.
• Don’t sign blank documents.
• Be wary of conditions, especially if they want you to put up an asset such as your car as security, meaning the lender can sell it out from under you.
• Know exactly how much interest you will be paying, along with what fees and penalties may apply and the term of the loan. 

Once you have taken out a consolidation loan, you should consider reducing the credit limit on your cards or closing them altogether.

Your bank may insist that you do this – and it will help you avoid getting into the same situation again.

For further reading: MoneySmart