The psychological benefits of debt consolidation

Last week and the beginning of this week has been all about debt consolidation for a number of clients – including personal finance, home loan lending and in business finance.

Credit card debt, always accepting higher limit offers (whether you need them or not) and having more than one credit card, are attributes that are commonly expressed as what led people into difficulty. Throw in a personal loan, car loan and maybe a tax debt for a business owner; it’s these kinds of circumstances that can make managing your monthly cash flow a bit of a juggling act and the interest bills can really add up along with the fees.

Whilst consolidating debt can lead to lower interest rates and smaller fees there are a few other benefits that don’t get as much airplay. Given it’s been something so present over the last week I thought I’d take the opportunity to talk a little about those. 

Consolidating debt can simplify your situation and repayments. 

If you’re juggling multiple debts, multiple cards, different interest free periods, a number of payment dates, direct debits combined with manual payments it can be a lot to keep on top of. Often you’ll also have the the threat of impacting your credit score, and being lumped with late payment fees if you miss something (ATO garnishee notice anyone?). If you can consolidate your debts by reducing the number of liabilities that you manage it can make life much simpler, easier to track and you can monitor that you’re actually reducing the debt effectively. 

Another benefit of debt consolidation is that revolving debt is often replaced with term debt. 

Revolving debt, like credit cards, essentially has no end date, and this can also apply to tax debt and lines of credit for business owners. Clients literally describe feeling like they will never ever be able to pay off their debts. When you consolidate your debts and replace them with a loan that has an end date attached to it you can actually start to see an end to what might have felt like a debt spiral. Feeling like you’re in control of your finances can be life changing.

Let’s summarise those quickly as I think it’s really important. Consolidating debt can simplify your life. Consolidating debt can help to give you control over your finances again. Yes, rates and fees are important too but the psychological impact of a simplified situation that you have under control are the most important reasons to consolidate debt if you feel it’s getting on top of you.