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Should I use a debt consolidating agency?

debt consolidation

Are your personal debts spiralling because you have too many credit cards charging high interest rates? And, because the payments are due at different times, if you overlook any of them you may be slugged with penalties.

Consolidating the debts could be the answer.

It involves gathering together most debts  – credit cards, personal loans and store credit but not business or investment loans or the home mortgage – to calculate how much is owed and what the loans are costing.

You can roll them into one loan at a lower rate of interest so that the cost is lower and you can make repayments on the lot with one regular payment.

The aim is to streamline payments, reduce the time taken to make them, lower the interest burden and avoid overdue payment penalties and the hassle of dealing with debt collectors.

Where do I start?
Debt consolidating agencies are prolific emailers. I get about three offers each week.

All banks and credit unions also offer this type of product.

InfoChoice has a listing of personal loan providers, of both secured and unsecured loans, with interest rates ranging from 5.9% (Citibank) to 17.98% (Bank of Melbourne and St.George). They have different conditions and terms. See infochoice.com.au (“personal loans” tab).

What do my debts cost me?
Credit cards and store cards are the most expensive – some charge as much as 24%.

A $20,000 credit card debt, with minimum payments made at 18% interest, will take a shocking 54 years and nine months to repay, with total payments of $74,634 (excluding any fees).

If the debt is $40,000 at the same interest rate and only the minimum payments are made, it will take almost 66 years to extinguish and payments would total $151,238 – $111,238 in interest. No wonder the banks throw credit cards at customers.

How will consolidation help?
We looked at NAB’s personal loan debt consolidation offer. It charges around 13.4%, midway in the range of interest rates on the InfoChoice list.

It has a variable rate and is unsecured, so you don’t have to put up any assets as security (to be seized if you default). Excluded debts, along with those mentioned above, are debts that have already been transferred to your credit card.

You can apply through any NAB channel by completing an application form and providing statements of existing debts.

Before you take out the loan make sure your new package, including fees and costs, is considerably lower than what you pay now. Use NAB’s online debt consolidation calculator.

NAB’s loan has a $150 application fee and a $10 monthly administration fee. There is no exit fee if you win the lottery and repay the loan earlier than anticipated.

What are the risks?
As with all debt arrangements, if you can’t afford the repayments and default, legal action usually results.

That could take the form of a court judgement, proceeding to bankruptcy.

If the personal loan is secured against your home, you may have to sell it.

What should I look for?
Any consolidator who fails to look at your circumstances, rushes you or asks you to sign blank documents should be left to find another sucker.

Ask what fees are charged and how long it will take to pay off the loan.

Don’t be talked into switching your home loan to accommodate your consolidated personal debt. That will be expensive and means the consolidator is merely churning your loan to earn a big commission.

You may be thinking of rolling your personal debts into your home loan because you have built up equity.

If you go ahead, make sure you increase your mortgage repayments to pay off the consolidated debt quickly to avoid paying substantial interest.

Pros
• Less time spent dealing with individual debts and creditors.
• A lower interest rate will help you get your finances on track.

Cons
• Check the  costs and fees to make sure you really will be better off.
• Be on the lookout for dodgy providers who just want a juicy commission.
• Your home could be at risk if you have to use it as security.

My call
•  If it saves you money and worry, consolidate all those troublesome debts into one. But don’t then think it is all behind you and apply for another credit card to go on a spending spree. Adding to debt won’t solve the problem.

Written by Anne Lampe

Anne Lampe

Anne Lampe has written for The Australian Financial Review and The Sydney Morning Herald, winning a Walkley award in 1991.

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