What you need to know about debt consolidation

This article is part of a fictional case study series following "Sarah", a typical first home buyer in Victoria. Read each article to follow "Sarah" through a variety of articles exploring issues related to buying a home.

Sarah was making good progress on her debts and getting them cleared. But after a while she noticed that it was a hassle paying three different debts at once.

That’s the idea behind debt consolidation: it takes several debts and puts them all in one, so you only have to worry about one payment.

It can be a useful tool. Which is why Sarah went to see her bank to inquire about debt consolidation. Here’s what they found:

Sarah could put three payments into one. With a debt of $10,000, one of $5,000 and another of $5,000, Sarah was wasting hundreds on interest. By putting them all in one loan at a competitive rate lower than the individual rates on each debt, she was able to save several hundred dollars a year. That’s money she can put towards paying that debt off faster.
Sarah simplified her life. Instead of having to deal with three lenders, she communicated with one.
Sarah was able to plan her money better. By only having one payment every month, Sarah was able to adjust her budget. She was less likely to miss a payment, and could always plan around it for bigger expenses.

Debt consolidation isn’t a silver bullet. It isn’t going to actually reduce your total amount of debt, but it will generally mean extra interest savings and a much simpler way of dealing with it. Just remember:

You’ll still need to diligently make extra repayments to get rid of it faster.
It shouldn’t stop you from saving money! Don’t put your foot on the brakes – keep saving, and saving hard.

SARAH'S TAKEAWAY:

Consolidating isn't going to get rid of Sarah's debts, but it might help her get rid of them faster - as long as she doesn't stop paying them off aggressively.