She's On The Money - Consolidating Debt & Refinancing

Episode Date: August 3, 2021

Debt consolidation - what is it, how does it work and is it the right option for you? Today we unpack the pros and the cons of this method of debt management, including the impact it can have on your credit score.If you need extra help figuring out if debt consolidation is right for you, chat to our friends The National Debt Helpline - 1800 007 007.The advice shared on She’s on The Money is general in nature and does not consider your individual circumstances. She’s on The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Victoria Devine is an Authorised Representative of Australia Pacific Funds Management Proprietary Limited ABN 34 132 463 257 - AFSL 339151.See omnystudio.com/listener for privacy information.

She's on the money. She's on the money. Hello and welcome to She's on the money, the podcast for millennials who want financial freedom. Debt consolidation. What is it? How do we do it? And is it the right option for us? While it can seem like a really great option for some people, there are a few traps we need to be aware of to avoid ending up in a worse financial position than where we began. And today, we're

unpacking them all. My name is Georgia King, and joining me today to get to the very bottom of it all is award-winning financial advisor, Victoria Devine. V, let's start with the basics. What is debt consolidation georgia debt consolidation a fickle thing and if you're considering it you might be in a little bit of a pickle hey that rhymed i'm a poet didn't know it was good that wasn't good that wasn't even scripted in fact if it was you would have backspaced it real quick but debt consolidation is essentially just a way to roll a whole heap of types of debts into one debt which can be a whole heap less overwhelming the idea is to try and achieve a lower interest rate and lower monthly payments so that you can get on top of the debt instead

of feeling like it completely gets away from you. Essentially, the idea is to try and achieve a lower interest rate as well as lower monthly repayments so that you can get on top of the debt, stop being overwhelmed, stop having a whole heap of debts coming out. It just makes your life a whole heap easier, especially if you have found yourself in a little bit of a pickle. Mm-hmm. And do we go to like a bank and say, hello, sir, like I would like a big new debt and then can you put the other ones in there? Is that how it works? I've got a feeling it's not. That's actually how it works, but there are a couple of reasons why you might consolidate your debt. So let's start there, not with just asking for it, but it's really important to

understand exactly what debt consolidation is, how it works and what's going on with it and why you might want it. Because a few people in our community historically have said, oh my gosh, like I have a few credit cards so what I'm going to do is apply for an interest-free credit card and then I'm going to roll my other credit cards into that which is possible but there's a really big trap there because the only reason I'd be like yeah gee like that sounds like a good idea is if you genuinely knew you could pay that debt off within the interest-free period of time so say they say hey it's interest-free for six months and you go great no problems but you've got a ten thousand dollar credit card that you need to pay out are you actually going to be able

to pay that out? Or are you going to put yourself in a sticky situation where you consolidate your debt into this one interest-free credit card and then it stings you with a higher interest rate after that six-month introductory period? So, we need to be really smart about the decisions we're making because in the short term, you might go, oh my gosh, this is going to make me feel so much better. But long term, it's a really bad financial decision. So, keeping in mind your goals for debt consolidation. So, essentially, debt consolidation is picking up a whole heap of debts that you have and transferring them into one individual debt with one single like facility so that you can potentially make it a whole heap more manageable. The sticker here though, Georgia, is that it's not

actually available to everybody. So sometimes if your debt is one of those things that is overwhelming and something that is really hard to deal with and you've tried to go through debt consolidation before and they've said, no, you're actually too risky for us to want to do that, The next best step I genuinely would consider is calling our friends at the National Debt Helpline because they know exactly what next steps to take. And unfortunately, they're not always the same. They change dependent on situation and they'll be able to help sort you out there. But essentially, if you're considering debt consolidation, it's usually because you have a few different debts, you might be overwhelmed, or you might just be on top of them and just want one easy repayment as

opposed to having your car loan coming out, having a credit card and your partner having a credit card. And like, maybe you have a small personal loan that you're paying back. Maybe it's just easier. So debt consolidation is definitely something to have a think about and work out if it works for you in your personal situation. Okay. So there's pitfalls to be mindful of, but we will get to them a little later on in the show. So how does it work though, do we call up our financial advisor? Do we take a trip to the bank? How are we actually consolidating these debts? So the first thing is to think what type of facility you would like to achieve. So you don't necessarily have to call your bank. You could call a broker or

someone who can do that for you. To be honest, the best step would be researching, and I know I don't want to say it on the podcast, just Google it, but literally Google debt consolidation and see what types of options are available because there could be one available at your bank. So say you've got a personal loan and a car loan and your credit card with NAB. Maybe you want to just go straight to NAB and say, hey, could we consolidate these together? What can you do? It's completely up to you and your situation. But there are also people out there that are going to be able to help you consolidate debt and put you in a better financial position. So do we need to worry about our credit score within that process? Do we need to check that

out before? Yes, sir. Very important. So you need to make sure that you're eligible for a debt consolidation. As I said before, there are some people that actually just aren't eligible for debt consolidation. It might be because you currently don't have an income and when you got the loan you did and they're not willing to service that because they're deemed too risky. So the first thing I would say, obviously look into what debt consolidation is, understand it, listen to this podcast, you genius, and then go get your credit history. So jump on and get a free credit report. As you guys know, there's Equifax, there's Experian, there's Illion. And then, you know, you remember from last season, we worked with our friends at Wiser. They provide

free credit score checks, which is really important. And once you understand your current position, then it would be all about working out which lender would work best for your personal situation. So, a broker might be best positioned to assist you with that because they can pad out the story that you're going to the bank with because in a lot of situations, the bank's going to want to know why you want to consolidate that debt. So, when it comes to debt consolidation, they're going to want to know your motivation behind actually applying for that, not just saying, oh, can I have a debt consolidation? I have three debts. They're going to go, why? And you'll say oh well actually it makes it more reasonable so that I can save more or so that I

can make it easier or more manageable so they're going to want to know your motivations as well because if your motivations weren't as pure as most people's they're going to say no so I think it's really important to understand your eligibility get your credit score and make sure that you're somebody that a bank might lend to before considering that and as I said if all else fails our friends at the National Debt Helpline will help you with this again they're never sponsored they're just good eggs doing good things putting you guys in better financial positions which gee we love that's what we're all about so would you say is there a difference between going directly to a bank and going through a broker in terms of who has our who has our best

interests at heart like will the banks be more likely to kind of rip us off so you're always going to be the one that has your best interests at heart I don't think in this situation a bank is necessarily going to rip you off but if you're going to take the time to consolidate a debt I'd want to be talking to a broker because talking to a broker means you're going to have access to a whole heap more options than just the options that one bank has access to. I think you also need to look at your motivations right so if you're just like oh yeah I'll just refinance that because you're being financially irresponsible I want you to go deeper I want you to care about your budget. I want you to care about your cash flow. If you have a whole heap of different debts

with various lenders and you can actually manage all of those, it's just you being a bit unorganized. I would argue that if you have a couple of really low interest credit cards, consolidating it just to make it an easier payment might not be best for you. You actually just need to use the snowball method or the avalanche method to actually smash down those debts and put yourself in a better financial position. The other thing I'd really want you to look at is why are you in this debt in the first place and is consolidating it and taking that pressure off actually going to put you in a position where you get into debt again? Or are you going to consolidate it because you're like, nope, final straw, I'm not going to get myself into any debt. This makes it easy so that

I have a lower monthly repayment so that I can save and create financial freedom for myself. So I want to know exactly why you want that Georgia, not necessarily is it a good idea or not? Like, are you putting yourself in a better financial position by doing it? Yes or no? And also, how are you going to plan to not do it again? Okay. You said that it's refinancing. Is debt consolidation refinancing? Are they the same thing? Essentially, you're refinancing a loan. So, in the same way that you might have a home loan and a couple of years after you establish that loan, you might go, oh, there's a better, more sexy option out there. I want that. And you go back to your broker, you are actually refinancing a debt. So what would happen is,

let's say bank A has said, yep, gee, I'm going to consolidate your debt. I'm going to do that for 20, like you'll get a $20,000 loan. We would then use that money to pay off your credit cards and pay off all of your other debts. So you then only have one debt remaining. So it kind of all gets rolled into one place. They're not extinguishing it for you. We're not talking our way out of any debts, we are actually just putting ourselves in a position where we have just one repayment instead of many. Talking about that for a hot second though, if you're in a credit card pickle or you are in a situation where you've got a personal loan that you are struggling to repay, debt consolidation is a really great way to negotiate. So I know that this is a little bit

left field and a bit off center, but important to know still, if you're going to consolidate a debt or you are going to pay it out or for some reason you have a whole heap of savings you just haven't paid that debt out then is a really good time to pick up the phone and say hey I can't afford it can't pay back that loan the bank are going to go oh my gosh like we want to recover whatever's possible so you say can we come to a different settlement so say you have a twenty thousand dollar personal loan and you go guys I'm really struggling to pay this back can we come to a settlement number like what would you take today if I just paid that loan out in full instead of me going back and forth and like maybe missing payments like what is the best you can do and in

some situations they are able to actually cut that loan down so instead of you paying that twenty thousand dollars back they might say gee all right if you pay today it's 15 grand which is a very great option and if you don't ask you don't get I don't think there's any shame in calling up and being like well what could we negotiate out of that like if I've got the cash sitting there or if I have access to be able to pay you out today what would that look like how can I get out of this debt and save some money at the same time kind of feels like a no-brainer to me yeah no that's smart um okay so back to debt consolidation v consolidation uh what are your thoughts on it as a financial advisor is this something that you are recommending to your clients frequently

yeah absolutely it depends on what the situation is like if you came to me and we do our fact find process G and then we find out that you've got a whole heap of credit cards with really high interest rates and you're actually a good little saver, but you've just got these credit cards, debt consolidation could be a really powerful tool for you because you're a good person to lend to. Just because you have debt doesn't actually make you a bad person to lend to, which I think is a really common misconception. When they say you're a bad person to lend to, and I mean, that's probably not the right language, but we're going to go with it, guys, because that's how we would talk about it just you and me yeah but it doesn't make you a bad person it actually just means are you somebody

who pays back your credit on time so say gee you went and got a credit card and your friend went and got a credit card at exactly the same time and you paid yours off consistently every single month with absolutely no bumps in the road you always pay your fees there was never any question but your friend did the same thing but just missed payments here and there and kind of was like oh whatever like I just won't pay it this month I'll just pay it next month or got a couple of additional late fees and stuff like that that shows up on your credit report so just having a credit card or not doesn't necessarily make you a bad person to lend to it actually puts you in a position where they go all right so she took on that responsibility could she handle it in your

situation Georgia and I gave you the good outcome here just FYI because I know you're a responsible gal pal but in your situation they might look at that and go oh she always paid it back no no problems at all she's a responsible gal pal she's a responsible girl whereas your friend even with exactly the same credit card just by missing a few payments and maybe not being as responsible that would put her in a position where a bank might say no you can't be held responsible for something like this because you haven't been able to prove it historically so it's not necessarily just having debt it's actually how you deal with it and that's why I jump down people's throats and I don't mean to I'm not aggressive in real life ask Georgia I'm five two like I'm really not that

scary if you're not able to make a repayment on something and you're like look you know a lot of people have gone through this recently where financially the pandemics hit us really hard instead of burying your head in the sand call your electricity company call the credit card people have the payments deferred instead of having a instead of having a default on your credit report like you can protect your credit score just by being open and honest and truthful and calling them and saying hey gee so sorry um you know how i owe you 50 bucks i'm not able to pay that this month is there anything that we can do and more often than not they'll say okay no problems what if we just pushed it out by 15 days would that be all right and you go oh yeah actually i get paid

next friday like i could i could pay it then and they go great no problems we'll push it out for free no fees associated with that no defaults on your account nothing we don't have to chase you up and you're putting your future self in a better financial position even though you can't afford it today so it's all about and i feel like a broken record not putting your head in the sand when it comes to debt or payments that you owe but i guess back to debt consolidation i have recommended it to some clients. I've even helped some of my clients facilitate that happening with their brokers. But I also have had to have some fickle conversations with clients, sat them down and said, actually, gee, you and I both know you can pay this off. So pull your finger out and get it

done. Like stop trying to rely on a different solution instead of just buckling down and paying off the debt. So I, as a financial advisor, I'd like to think I'm a good advisor, but I'm definitely not going to always be like, oh, let's do the easiest option or let's do the option that makes you feel the most comfortable. Because sometimes to put ourselves in a better financial position, we have to be a little bit uncomfortable. All right. Before we head into the break, V, we've obviously just been chatting about credit scores. Does debt consolidation impact your credit score? Yes, potentially, because you're taking on a new debt. Again, it's all about how debt consolidation is going to be dealt with. Are you actually able to meet that fee? Like what

did it look like before? And that's something that you can talk through with a broker and work out what that means. But essentially, I would assume the reason you're consolidating a debt is to be more responsible and pay potentially more off or lower your rate of interest that you're paying on that, which from my perspective is a step in the right direction. Yeah. So long-term, it will have good impacts yeah because we're trying to get out of debt right money win the perfect place to head to the break i think vd but after the break we will be chatting through the pros and cons of debt consolidation and we'll be chatting through some alternatives if it's maybe not the right option for you spoiler you can uh consolidate your debt con you still have the debt see you

after the break. Well wrapped. All right. Now into the rest of the show, V, what would you say are the main benefits of debt consolidation? I would say that there are a few and the number one benefit I believe would be the feeling of being more in control and that peace where you feel a lot more liberated and less constricted and with a plan for your finances moving forward and a clear idea of when you're going to be out of debt is really empowering. Often with credit cards, even if you can quote, afford the minimum repayment, that's really stretched out. It is a really long period of time that you'll be paying that back for. And debt consolidation is essential if you're in a situation where you've got a number of different credit cards and you're paying the

minimums because at the end of the day, it's going to be 30 years before you actually pay those off. Whereas with a debt consolidation of personal debt, you could be out of it in 10 years in comparison. So you're not just doing the best thing right now to feel less stressed. You're doing the best thing for future you as well, because the second that debt is gone, the second you can start creating financial freedom. And I say this all the time and I want to keep saying it because I still get that question. Should we be saving while we're in debt? Which, you know, obviously you were going to ask me right then and there, weren't you Georgia? The answer is yes and know. Yes, you should be saving for an emergency account. The reason we want an emergency account,

Georgia, is because we really want to put ourselves in the position of power. So if another debt comes up or another cost comes up, we don't have to put it on debt again. Like if retro came out, you'd be like, oh my gosh, like I've been smashing down this debt. I have no money set aside for something like that. So being in control of your budget and your emergency fund is essential. But during this period of time where you are in personal debt yes having an emergency account is important but we're not saving for our home deposit we're not saving for our future life we aren't saving for things like that that are above and beyond like we're not planning for our next holiday I'm not saying you can't do those things in collaboration like if you've consolidated your

debt and it's all well and good and you know what that payment is and you've integrated into your life because you're good at budgeting cash flow because you clearly did my master class that's a different story but if you're in mountains of credit card debt and burying your head in the sand stop trying to save and pay the minimums we need to get rid of that debt because paying off debt in itself is an investment it's an investment in your ability to save it's an investment because if you are paying interest at 18 that money is essentially making you 18 when you pay it off because you don't incur an 18 bill later so i could rant on about this for literally hours but I will save you that and ask you, do you have any other questions to segue away from this?

No, I really like what you've said there because it's kind of switching your mindset to understand that paying off your debt needs to be the priority because even though you might have 10 grand in your savings account and think that that's awesome. It's not. You're hurting future you. If you've got 10 grand in a savings account and a $6,000 credit card, you only have $4,000 saved. If you are saving while you are in debt, you don't have savings. And I'm quite aggressive about that. I feel like when we first launched this podcast, I was a lot softer. I was a lot more comfortable with just being like, okay, cool. Like that's what I would do. But honestly, it's putting you in a better situation. If I'm really blunt

with things, I'm not here to be your best friend. I'm here to be your big financial sister that helps you get through this. And sometimes you don't like what you have to hear. Sometimes it's not good, but it's what is best for you. And I genuinely want what is best for you. I don't want you to be in debt. I don't want you to be financially struggling. And this advice is going to get you out of that position so that you can flourish. And like, how cool is that? Speaking of things that we might not want to hear, let's move on and talk about the traps of debt consolidation. Neat segue from George. Neat segue. I like that. You're a smart gal, Well, sometimes, sometimes all the time, but there are actually a lot of things that you do need to

be mindful of. And this is probably the most important. And this is probably, I mean, I would say that my rant on paying debts off before saving is important, but I would say that this is also one of the most important parts of the show. So get ready to take some notes. It can take us longer to pay off a larger loan, which could potentially cost us more. So to negate this, we actually need to weigh up before we consolidate debts if it is an option that will save us money or lead us to spending more. So let's do a quick example, G. If you've got a car loan and a personal loan and a credit card and you're like, these three things are really overwhelming, but you've only got a thousand dollars on your credit card, maybe just smashing that out and getting rid of one debt

instead of consolidating them all is going to be a better solution for you. Because often, and I'm going off on a tangent here but often when we have a car loan that's usually a secured loan because the loan's secured against that asset whereas when you go to consolidate debt more often than not they're not able to secure that loan against something that could sound quite confusing in the moment Georgia but essentially when you have a secured debt the interest rate is lower but when you have an unsecured debt the interest rate is higher so financially you might be better off just keeping that car loan there because it's a lower interest rate because it's secured paying off that credit card getting rid of it avalanching it smashing it out and cutting

it up and then focusing on just two loans even though in the grand scheme of things the idea of one loan is more comforting financially you might be better off with just keeping things the way they are so you do need to make sure that this works for you but again it's an option that could save us money as well. So it's kind of two sides of the board. The second is it can leave us with the temptation to spend more and leave you in deeper debt. I say this because if you've had a whole heap of credit cards and that's always been really overwhelming and you consolidate them all into one loan, you no longer feel like you have a whole heap of credit cards. And if we don't address the reason why you got into so much credit card debt initially, you're very likely to

go oh well actually I do really want to go out that holiday I don't have any credit card debt right now because somehow that consolidated debt didn't spring to mind and you go ahead and apply for another credit card and get that because obviously you're good at paying back your consolidated debt and you end up creating the cycle again so if you do get more credit you need to make sure to stay on top of things and you need to again going back and telling you to do your budget and your cash flow and being on top of that because that is the best thing in this situation. And then another trap is not doing research beforehand. If you don't do the research and check the fees and the charges and the interest rates of your new loan and compare them to what

you'd be paying if you paid the debt separately, you could end up in a pickle. Again, just doing your research, but also understanding whether making additional payments is allowed. So in some loans, they might say, hey, G, yeah, we'll give you a $10,000 loan for five years. And you go, okay, that seems reasonable, but you can't pay it off early. And if you do, there's a $500 fee. You go, oh, that doesn't feel fair because I was just going to put all my debts into that and pay that minimum, but also try and throw all my additional cashflow to that. Because Victoria said, if you've got debt, you haven't got savings. And then you find that you're not actually able to facilitate that because they've trapped you in that position. So always make sure that when

you're establishing a loan, you go, hey, what if I make additional payments? What kinds of fees and charges will I be charged to pay out the loan in its entirety? Interesting. What if you got it down, G, to like two grand and then you got your tax back and that was two grand and you could extinguish that loan completely and you're really excited about it, but then you find out that there's actually a whole heap of fees and charges by exiting the loan early. Cheeky. I didn't know that was a thing. Not fair, is it? Not fair. No. On that kind of line of thought, are scams a thing in this space? Sadly, yes. So if you go down this path, make sure it is legit. You can do that by Googling them. You can do that by checking with your broker. Going through a broker will obviously

avoid scams, but there are some scammers out there who will make you pay fees upfront to set up the loan and then they actually never follow through and give you the money that you're required to pay out the other loans. And it's a bit of a circus. We did speak at length about something really similar in our scams episode. So if you missed that one, head on back, but it can be really hard to get your money back from scams. So please, please, please do your due diligence and to avoid any type of scam, obviously head to our favorite website, which is the ASIC website and make sure that the credit provider or brokers are actually licensed and legit, which is a hot tip there. And then also if you have a home, like you own a home or have a home loan, it could

impact that if things go pear shaped. So remember that if you have put up an asset as a security on a loan, that that could potentially be taken away if you don't pay off that loan. So make sure that you are putting yourself in the best possible position. And my summary would be get a little bit of advice, reach out, have a chat, talk to some people and make sure that you're not just making a late night decision because you're really stressed about it and you just applied online at 2am. Think about it. Take a few days to work out what the best possible decision for you is. All right. So to finish off today, V, if debt consolidation isn't the right option for us, what are our other alternatives so many options okay not heaps but like there are a few and

they're gonna work my friends so first things first we want to smash out our debt and i always say this and you know my partner steve makes so much fun of me because i actually yeah what a legend i actually talk like this at home i'm like yep cool so we're gonna have our mortgage and we're gonna have this and we're gonna smash that out and he's like oh you sound like a financial advisor I don't know how to break this to you, but you want to smash out your debts and create a plan to reduce your debts as fast as possible. Two of my favourites are the snowball method and then the avalanche method, whatever works for you. The next is create a budget and cashflow plan so that you can get out of debt sooner. I'm biased. I reckon that my budget and cashflow

plan is arguably the greatest budget and cashflow plan to ever be created by Victoria Devine. See how I looped that back there. But definitely sit down, write out your budget, understand what's coming into your bank account and what has to go out and what surplus cash flow you have to contribute to that debt to get out of it sooner and take it a step further. Work out how long it's going to take you to get out of debt if you contribute another $100 or another $200 each week or month or year or however long that's going to take you because that can be really motivating. And it can also drastically change the time period. Like I know that if you were paying minimum payments on your credit card, it'd take 15 years to pay it off. But if you paid an

extra $100 a month instead of just the minimum, it might be back in like four years. So it's one of those things that could shave so much time off it and make such a difference. And again, to quote myself or more accurately to quote Paul Kelly, from little things, big things really do grow. And so even if you can only afford a few more dollars on your credit card, I absolutely would recommend looking into that because the minimum payment is the minimum. We don't want to just be paying the minimum if we can afford it. The next year's Georgia, and it's one of the final ones. Don't beat yourself up. Being in debt is not a bad thing. It does not make you a bad person. It doesn't even mean that you made bad decisions. It just means that you spent more than

you earned. That's not a bad thing. Like if a friend came to you and said, hey, Jay, I've got some personal debt, you're not going to judge them. You're just going to go, hey, how do I help you get out of this? Or is there something I can do to help? Or do you want to talk about it? Like being in debt does not inherently make you a bad person. And I have so many conversations with friends and family and people in my community that say, oh my gosh, I'm so embarrassed. You shouldn't be embarrassed, friend. Like you really shouldn't. Like you're not a bad, I just, I feel like I could go on about this all day. Debt is not a bad thing. It is just a reflection of the fact that you spent more money than you earned and that is as simple as it gets and the longer

we spend beating ourselves up about it the longer we spend not paying it off and again if you need to have another chat with somebody and you just don't know where to go we couldn't recommend a chat with our mates at the national debt helpline anymore they are literally beaming angels that we adore and you should give them a buzz if you're in a bit of a pickle 100 and if you're not already come and join us in the facebook group because there's conversations about debt happening in there every single day so come join us yeah there's some good eggs in there giving good advice i heard g it's not us by the way it's actually the community sharing their stories so i love it over there but as always i think we've run out of time on this one georgia but just before we head

off we'd like to acknowledge and pay respect to australia's aboriginal and torres strait islander peoples they're the traditional custodians of the lands the waterways and the skies all across australia we thank you for sharing at the caring for the land on which we are able to learn we pay our respects to elders past and present and we share our friendship and our kindness and remember guys that the advice shared on she's on the money is general in nature and does not consider your individual circumstances she's on the money exists purely for educational purposes and should not be relied upon to make an investment or a financial decision and we promise victoria divine is an authorized representative of australia pacific funds management proprietary limited abn 34132463257

AFSL 339151. And guys, before we do leave you to your day, I'm going to ask you very cheekily that if you do love the show and you want to support your girls, then please do leave a review. You just scroll down to the bottom of the show and you can plug in whatever you want. You can leave a nasty one if you want as well. Don't promote that. Don't, please don't. And also rate five stars if you if you like it anyway that's enough desperation for me uh remember as well that v's budgeting and cash flow course has an exclusive little discount for our listeners if you just type in pod 50 that's pod 50 you'll get 50 off uh when you sign up to the course just for being a friend of the show precise amando great money win you're welcome guys i think so see you next week

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