Struggling with repaying debt is not a nice position to be in but there are solutions out there.
According to the Australian Bureau of Statistics, the average Australian has more than $17,500 in personal debt – including outstanding credit card balances, car financing, personal and student loans.
As many of these debts could be accumulating a high amount of interest, it’s no surprise that many people look to debt consolidation tools to help them regain a financial foothold.
One of the most common forms of debt consolidation used by consumers is to switch to low or no interest credit cards (known as balance transfers). In the case-study below, we’ve highlighted how this could cause more problems than it solves.
Getting Out Of Debt Case Study
James¹ was just one Aussie struggling with a $20,000 debt across a couple of different credit cards. He was managing to repay over $500 most months, but was still having to make purchases on the cards. Some months he could only pay the minimum amount, and both cards were reaching their maximum limits.
He had considered a balance transfer to a low interest rate credit card but with the period to repay the loan being under 18 months before the interest rate reverted to a higher rate, he knew that it would be difficult to repay the debt in that time.
Instead, James settled on a personal loan with a non-bank lender. As his credit history was good, he was able to access a loan at the rate of 11.95%* (comparison rate of 12.84% pa) – significantly less than his current credit cards.
He borrowed $20,000 and was able to pay out his credit cards in full. James now makes just one payment a month of $458, which he sets up as a direct debit, instead of multiple payments to different providers at different interest rates.
Over the five year term of the debt consolidation loan the total interest paid would be $6,861, compared to $11,472 if he had kept his $20,000 credit card debt and paid $529 a month towards both cards over the same period. That’s a saving of $4,661.
So, with a fixed-term loan James’ debt was covered every month, at a lower interest rate, and simplified through a repayment schedule. He says he’s going to put the savings towards a house deposit, or maybe a holiday.
Points to remember when refinancing debt:
1. Make sure that you are financially better off after all fees and interest rates when compared to your current credit card or loan.
2. Look for any potential ‘hidden’ fees. For example some personal loans may penalise you for early repayment, whilst some cards might issue a penalty payment if a minimum monthly payment is missed.
3. Shop around as different providers may offer better lending rates, especially if the borrower has an excellent or good credit score. But avoid making successive applications as this can negatively impact your credit report. Most non-bank lenders will offer a range of interest rates depending on the borrower’s credit history and meeting certain lending criteria.
4. Pay attention to potential changes in the lending industry for better deals. For example, the upcoming Comprehensive Credit Reporting reforms could mean a change to your credit score – which in turn could see you get a better interest rate for a loan.
5. Know where you stand on creditworthiness by checking your credit score. WisrCredit is the only site in Australia where you can get your credit scores from the major credit reporting bureaus in one place. It’s free, won’t impact your credit score and gives you the most comprehensive view of the financial you. Compare your scores with WisrCredit here.
1. His name has been changed for privacy reasons
Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Finance Pty Ltd does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.
* Comparison rate(s) based on $30,000 unsecured loan, fixed over 5 years, with monthly repayments. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.