Consolidate

29 May 2013

Debt consolidation can be a saviour when it comes to fees and charges, but there are risks, so make sure you’re always informed.

What is debt consolidation?

Debt consolidation happens when you roll two or more loans into one tidy repayment. The main reason people usually consolidate their debt is to save on fees and interest so that the loan can be paid off more quickly.

When you’re preparing to retire, it’s essential to have a good understanding of your expenses. Consolidating your debt may be something you consider so that managing your repayments for all of your different loans bit easier. This may include a car loan, personal loans and any credit card debt.

When it comes to consolidation, it’s important to consider all potential options and risks before making any decisions.

This means talking to any relevant financial planners or credit providers.

Gaining an understanding

When deciding whether to consolidate, a list is a good place to start. “Going through the exercise of putting together a full list of what your outgoings are, including debt, and looking at how you can reduce some of that or manage it in a more effective way is a good thing to be doing,” says Jeff Thurecht, financial advisor, Evalesco Financial Services.

Understand how much money you owe, how much interest you’re paying on each debt and how long you have to pay them off. Other aspects to consider are the number of fees and charges you’re paying.
It can sometimes be a question of whether retirees actually have much debt. Family homes may be paid off and expenses tend to be kept to a minimum. What’s important to remember is that Australia has an ageing population meaning most Australians tend to retire with some sort of debt and little assets outside of the family home.

Impact on the pension

Consolidating your debt shouldn’t have an affect on your pension because you’re not changing the level of debt, you’re just moving it all into one place. Jeff says this is the same when it comes to Centrelink benefits, however, when it comes to these benefits, it’s important to consider how you consolidate the debt.

“You can consolidate it against your home and it won’t give you any great change because your home is an asset exempt to Centrelink,” Jeff says. “But if you had an investment property for example, and you consolidated debt against it, that may be able to provide benefit to you in terms of increasing your Centrelink payments, subject to investment.”

Getting started

If you’ve made the decision to consolidate any debt you’ve got, the first step is to make sure you have all the relevant information on any existing debts. There are also a number of questions that you should look at answering.

Firstly, what is your goal? “Are you really looking to reduce cash flow or are you looking to pay off your debt more quickly, or are you looking to do a bit of both,” asks Jeff.

The next step is to do your research. Talk to your current loan providers and see how they can help you. Make sure you have all the facts before you enter into any agreement and shop around.

What to look out for

While the definite advantage of consolidation is quicker repayment and a reduction in the interest and fees, there are drawbacks to the exercise.

Look for any hidden costs and always, always, always read any fine print. One thing to look out for is ‘honeymoon rates’.

“Sometimes you can pay a cheaper honeymoon rate but they end up locking you into a higher rate for the remainder of the period,” Jeff says.

Also, you should be wary of any company that says they can repair or solve your debt. Things on your credit history cannot be removed unless you prove that they’re wrong so if a company says they can erase or improve your credit history, they’re incorrect.

Little can be done for your debt except paying it off. No company will be able to eliminate your debt.