If you find yourself in a whole lot of trouble in terms of debt, you have options and it’s important to know not only what they are, but how they’re different.
Broadly, they are debt consolidation and debt review.
Debt consolidation is for when you’re juggling many accounts but managing to stay largely up to date with payments. Here, you’d take a single new loan from a financial services provider or bank to pay off the existing debt. The new loan would be at a lower rate than your average interest charge on existing debt and may also be over a longer period. If you’re tempted to extend your home loan to consolidate debt, be careful, as the very long repayment period means that ultimately you pay a ton more on interest.
Still, the benefit is not only lower total payments but also getting out from under your various debt obligations. With debt consolidation there is no reduction in the principal amount owing and there is also no credit impairment. In fact, your credit rating remains unchanged and will start to increase in time. This would also certainly exclude your home loan as this is already cheap debt and you’re not going to get a consolidated loan at a cheaper rate.
Debt review is when you truly are in a hole and you’re unable to make the payments; you’ll have debt agencies after you for the money. In this case, you should turn to a debt review specialist, making sure they are a registered debt review business and registered with the National Debt Counsellors’ Association.
They will review your situation and if you qualify the company you’ve approached will contact those you owe money to and negotiate on your behalf. If this process is successful, you will owe less and your remaining payments will be lower.
Very importantly, this is a legal process and there are rules that have to be followed by all parties, so make sure you’re using a legitimate company.
Debt review will reflect negatively on your credit score; this will make it difficult, if not impossible, for you to qualify for new credit in future.
The benefit, of course, is that you will find yourself in a much better financial situation with a clear path to paying off the money you owe.
In my experience, the process works very well and most lenders approached in a debt review process are happy to engage and reduce the money owed — it improves the likelihood of their getting anything, and it reduces the costs associated with chasing you for that money.
In both cases the bigger issue is that you need to get in control of your spending. There is no point in getting out from under a mountain of debt only to get straight back into trouble.
Implementing a budget and not taking on any new credit are important and will go a long way to ensuring you’re in control of your money forever and not just a short few months or years.