Why now is the time to consider debt consolidation

AUTHOR

After enduring 6 consecutive interest rate hikes since May, and hearing analysts predict that they’re not over yet, it would seem the financial pressure on individuals and business owners is going to continue.

Personal budgets and business cashflows have already taken a hit due to increasing loan repayments – which is especially frustrating given the additional amounts do nothing to reduce the principal of the loan.

A few months ago, I urged business owners to consider raising their prices to ensure they survive in the current economic climate. Beyond this, there are other avenues to reduce the growing financial burden. Personal budgets and business cashflows have already taken a hit due to increasing loan repayments.

At a time when borrowing has become more difficult, and lenders are increasingly cautious, there is one simple way to boost cashflow while simplifying your finances and freeing up a little extra capital.

WHAT IS DEBT CONSOLIDATION?

Debt consolidation involves presenting all of your debts to a lender and asking for a single loan to pay them all out.

Bundling your debts in this way can have many benefits, including:

eliminating multiple repayments
reducing the effort to manage your debt
having a specific end date for your debt
(potentially) negotiating a better interest rate

Often, debt consolidation will also reduce your monthly repayment amount.

For example, you may have been paying $9,000 per month to meet the minimum repayment across 4 separate debts. After debt consolidation, the minimum repayment may only be $5,500 per month. This essentially frees up cash to put back into your business, which could be the difference between winding up, surviving, or thriving in the near future.

Sometimes, you are able to fix the interest rate on your debt consolidation loan for a specific term (usually 2 or 3 years). This gives you peace of mind that if interest rate hikes continue then you will still be OK.

In addition, replacing multiple loans with a single loan makes it much easier to develop an achievable budget. You know what your minimum repayment is going to be, and can factor this into your financial planning.

SHOULD I CONSOLIDATE ALL MY DEBTS?

If you have a lot of random debts and aren’t sure which ones to pay off or consolidate, our advice is clear and simple:

Pay off any debt that you can’t claim as a tax deduction ASAP!

Especially if these debts are relatively insignificant, it’s worth paying them off quickly and then seeking to consolidate larger debts.

You should also aim to pay off any “fast loans” from less-than-reputable providers as quickly as possible. These providers usually offer extremely bad terms which place business owners in a difficult predicament, so any action you can take to clear them and move on should be considered.

Ideally, taking a measured and intentional approach to managing your debt will give you the best chance of success. Sometimes you may need the support of your accountant or an adviser, simply to figure out all your options so you can develop a solid plan moving forward. This not only applies to business owners, but also individuals who are struggling to manage debts across their mortgage, personal loans, and credit cards.

CAN I RE-USE MY CREDIT CARDS AFTER PAYING THEM OUT?

While debt consolidation will free up funds once loans and credit cards are paid out, be wary of going into more debt as this can quickly spiral out of control.

What you want to do is set rules and goals for yourself ahead of time – such as cancelling all but one credit card and then reducing its credit limit to an acceptable amount.

Your accountant or business adviser will be able to help with these goals, and can work with you to:

assess your total financial situation
understand your debts
evaluate your income (including pricing) and expenses
develop a budget or cashflow plan

They will also likely know of suitable lenders who offer reasonable loan terms, and can help you complete a loan application for debt consolidation. If you prefer to stick with your current bank, they may be able to assist you to negotiate a competitive fixed interest rate for your new loan.

At RSM, our accountants and business advisers are always available to help and can provide a free health check so you can get a true picture of how your business is performing.

For further information

To speak with an RSM advisor regarding your debt, please contact your local RSM office.