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DEBT CONSOLIDATION IN AUSTRALIA

With ever-increasing levels of household debt it's no wonder that debt consolidations are gaining popularity. Debt consolidation is a real option for most borrowers regardless of their circumstances in that interest rates on personal loans, car leases or other unsecured debt is always higher that that payable on a mortgage secured over real estate. Most borrowers however only consider debt consolidation when there is some concern over cash flow. If you do find yourself in the position of needing to consolidate your debts, how can debt consolidation help you, and what other options are available?

There are a number of proven methods for debt consolidation.

If you have equity in your home and have managed to pay down your loan ahead of schedule while rates were lower, often the most cost-effective way is to redraw against your home loan to pay off other debts. Not only does this make repayments more manageable, but can substantially reduce interest payments, because as noted above home loans tend to have lower interest rates than other forms of credit.

If your current loan amount is fully utilised but you still have equity in your proerty then you can apply to your existing lender for a variation of your mortgage. It may be that you only need to increase the loan by $20,000 to cover of the personal debt or car lease and with luck also have a slight buffer for future unexpected expenses.

Alternatively you can roll all your debts onto a low or no interest credit card, making substantial savings for the period of the lower interest rate. If this is your chosen consolidation method, it's important to remember that at the end of the interest free period, interest rates on the card are likely to revert back to a level similar to the rate you are trying to avoid by consolidating in the first place. Be aware that you need to be very disciplined if you want to consolidate your debts onto a credit card, and make sure you pay all - or a substantial part - of your debt off before the balance transfer period ends.

The most important thing to remember if you are contemplating a debt consolidation is to continue to pay as much as possible each month off the balance of the consolidated loan. By only paying the minimum amount per month, all debts will still be active for the whole life of the loan - up to thirty years.

If you do decide to consolidate your debts, make additional repayments each month to reduce the total loan. Work out a household budget and stick to it to avoid the problem happening again. If you have problems sticking to your budget, try cutting up your credit cards and change to a debit card instead. They offer the flexibility and convenience of credit cards but allow you to only use your own money for purchases.

Above all, be wary of consolidating onto an interest-free period credit card, unless you are confident you can repay the debt before the interest-free period expires, otherwise you could find yourself back in the same position six months down the track.

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