Trying to repay multiple debts at once can be extremely stressful, to the point where it can negatively impact your financial and mental well-being.
While you may already be aware of the benefits of debt consolidation, such as how it can reduce the interest you pay, it doesn’t tell the whole story. It can be hard to know how those benefits apply once you become debt-free.
In this article, we’ll discuss the long-term benefits of debt consolidation in Australia. We’ll cover what debt consolidation is, how it works, its short-term benefits, and its long-term benefits. By the end, you’ll better understand how debt consolidation can help turn your life around.
Key Takeaways
- In the short-term, debt consolidation can help simplify your debt repayments and save you money.
- In the long-term, though, debt consolidation can improve your credit score and make it easier for you to build your savings.
- Talking to a debt consolidation expert can help you formulate a strategy that helps fast-track your efforts to a life free of debt.
What is Debt Consolidation?
Debt consolidation is the process of combining multiple outstanding debts into one. This usually means taking out a debt consolidation loan through an approved bank, credit union, or lender.
After being approved, you then use the loan funds to pay off your existing debts, before proceeding to repay the new loan. The idea is that the new loan has more favourable terms, such as lower interest rates and smaller instalment payments.
Debt consolidation may also involve performing a credit card balance transfer. This is where you transfer your existing credit card debt to a new balance transfer credit card – ideally one with a low or zero interest introductory period. This helps you save money on interest.
How Does Debt Consolidation Work?
How debt consolidation works is pretty simple. Let’s say you have multiple debts from different creditors – each with its own due dates, amounts, fees, and interest rates. By consolidating all these debts into one, you have only one repayment schedule to follow. That means you pay the same fixed amount on a consistent weekly, fortnightly, or monthly basis.
When you apply for a debt consolidation loan through a bank, credit union, or lender, they review your finances and credit report. Your recent financial activity helps you determine your risk as a borrower, influencing your odds of approval and the interest rate they offer.
Once approved, the funds are transferred to your account and you use those funds to pay off your existing debts. You then repay the new loan on a weekly, fortnightly, or monthly basis.
What Are the Short-Term Benefits of Debt Consolidation?
The short-term benefits of a debt consolidation plan is that it can help:
- Reduce the amount of fees and interest you pay
- Reduce your weekly, fortnightly, or monthly instalments
- Simplify your debt repayments by having only one fixed amount to repay each time
- Make it easier to plan your budget
- Look toward to a cut-off date for when you’ll be debt-free
As great as these benefits are, you may have already heard all of these before. The problem is that all of these benefits only apply while you are repaying the debt. But what happens after your debt is paid off?
What Are the Long Term Benefits of Debt Consolidation?
When implemented correctly, debt consolidation can help you achieve greater financial security. It can help you save money, increasing your future wealth. It can even contribute to a more positive mindset, increasing your confidence in money management.
Build Up Your Savings
While repaying debt, you have less money to set aside for emergencies and rainy days. This can impact your ability to pay for life’s surprises, such as sudden vehicle repairs or medical expenses.
Once your debt is repaid, though, things are different. You now have the time and space to set aside more money for your little nest. This could be money towards a new car, home renovation, or even a vacation. You could even just set it aside as a safety net, giving you greater peace of mind.
Improve Your Money Confidence
There is a direct correlation between a person’s financial health and mental well-being. Studies show that around 5 per cent of Australian adults experience both financial hardship and mental stress each year, with around 14 per cent experiencing it between 2017 and 2022.
Many who experience financial hardship and mental stress prolong seeking help for unhelpful behaviours like overspending. They may also withhold information from friends and family out of fear of judgment.
By being money smart to manage your debt, it can help lift a burden off your shoulders. Without worrying about your financial circumstances, you may be more inclined to spend time with friends and family. You may also be able to address the root cause of the initial debt, reducing the risk of falling back into unhelpful behaviour patterns.
Improve Your Credit Score
When you first get approved for a debt consolidation loan, your credit score may temporarily go down. This is because opening a new line of credit is deemed as risky to lenders. Over time, as you continue to meet your debt repayment obligations, your credit score will eventually increase.
By improving your credit score, you’ll have an easier time getting approved for other financial products like personal loans and credit cards. This is because lenders can see that you have recent positive financial activity on your credit report, namely in the form of timely repayments on the loan you just paid off.
Plus, a high credit score may also reduce the interest you pay on future loans and similar products.
Create a New Budget
When you’re in the debt repayment process, you need to adjust your budget accordingly. This way, you know exactly how much money is coming in and going out. It’s especially useful for ensuring you have enough money in your account before each due date.
Once you’re debt-free, things change. You no longer have to worry about setting aside money leading up to each instalment date. Instead, you can fine-tune your budget to suit your newly debt-free lifestyle. With more money in your pocket, you can set aside money as a safety net or indulge in some luxuries (minus the guilt).
How a Debt Consolidation Expert Can Help
When managing multiple debts at once, it can be hard to see the light at the end of the tunnel – especially when creditors and debt collectors are constantly calling.
Talking to a debt consolidation expert can help turn things around. At Debt Fix, we’re committed to making your life affordable again. Our goal is to help you regain control of your finances and live a life free from debt.
We understand there is no one-size-fits-all debt relief solution. That’s why we take the time to listen and understand. We evaluate your current circumstances and recommend debt relief options that are realistic and achievable for you. This way, you get the assurance that you’re on the right path to a debt-free life.
Talk to Debt Fix Today
Trying to get out of the debt cycle on your own can be tough. This is where Debt Fix can help. We have years of experience helping people just like you take back control of their finances – and their lives.
Get started by submitting an online application and let us help you work toward a life free of debt. It takes just a moment to apply and doing so won’t affect your credit score.
Talk to Debt Fix Today
Trying to get out of the debt cycle on your own can be tough. This is where Debt Fix can help. We have years of experience helping people just like you take back control of their finances – and their lives.
Get started by submitting an online application and let us help you work toward a life free of debt. It takes just a moment to apply and doing so won’t affect your credit score.
Frequently Asked Questions (FAQs)
Below are some answers to frequently asked questions about debt consolidation.
Does Debt Consolidation Hurt Your Credit Score?
Your credit score may temporarily go down once you’ve been approved for a debt consolidation loan. However, your credit score will eventually go back up as you continue to make timely debt repayments.
What Should You Do Once You Become Debt-Free?
Becoming debt-free is the perfect opportunity to build your savings. You can set aside money for an emergency fund or safety net. Or you can deposit money for a home renovation or a new car.
How Can a Debt Consolidation Expert Help?
Debt consolidation experts are highly skilled in negotiating with creditors and recommending the best debt relief options from hand-picked lenders. This increases the odds of creditors agreeing to more favourable repayment terms, meaning you may pay less through a debt consolidation loan.
