Know the traps before consolidating debts

DEBT consolidation can be tempting at this time of the year, but there are traps if you don’t understand how it works.

The idea of combining all of your consumer debts into one simple loan and repayment is growing in popularity.

New data from peer-to-peer consumer lender Societyone shows that more than 60 per cent of its loans are taken out to consolidate debt, followed by home improvements (11 per cent) and then vehicle finance (8 per cent).

Societyone CEO Mark Jones said Australians were becoming more financially savvy about debt.

He said younger people, in particular, were scrutinising traditional financial products such as credit cards.

“The biggest benefit of debt consolidation is the potential to make big savings on your interest bill,” Mr Jones said.

“Consolidating multiple forms of debt into one lowerinterest loan could result in hundreds – if not thousands

– of dollars slashed from your overall interest bill.”

However, not all loans should be consolidated.

“As an example, student loans often have quite low interest rates and may not be appropriate,” Mr Jones said.

He said borrowers should read the fine print and check for extra fees or prepayment penalties, which could undermine savings. They should also avoid making multiple loan inquiries that could dent their credit score.

Mia Chong benefited from a debt consolidation loan, which saved her interest and helped her buy a property faster.

“I had a couple of little loans and it was bothering me that I was paying interest on each,” said Ms Chong, a paediatric clinical nurse consultant.

“Keeping track of when the different payments were due was also a huge inconvenience, and I was always worried I might accidentally miss a repayment.”

Financia managing director Angelo Benedetti said more people were consolidating consumer debt into mortgages at rates below 4 per cent.

“With credit cards, a

20 per cent interest rate is an exorbitant amount of interest to be paying and getting nowhere,” he said.

Mr Benedetti said people who consolidated should try to pay debt down quickly. “Force yourself to pay over and above the base repayment,” he said.