How does Debt Consolidation work?
How can debt repayments be reduced by as much as 50%? By combining all debts into a new loan that is secured against your
home (or other assets) it is possible to select repayments that suit your financial situation.
This is usually done by lengthening the term of the new loan so that the monthly repayments are reduced and become more affordable.
In some cases a personal loan may be used, providing you qualify.
The Truth about Debt Consolidation
A longer borrowing term means lower repayments but the downside is, the longer the term, the more you end up paying in total.
Instead of paying your car, holiday or credit card off in 5 years as you would have originally, it may take you 20 years when they are consolidated into a
residential mortgage.
However the biggest downside of debt consolidation is that for a very high percentage of borrowers in Australia it does not solve
their problems.
All those looking to consolidate debt need to consider whether it was lack of discipline and/or financial
management skills that lead to the necessity. Following consolidation and despite initial good intentions, all too often Australian borrowers
eventually get into more debt and are worse off than they were before.
How to make Debt Consolidation work for you
A winning strategy is to take most of your money that has been freed up and make extra repayments on your new loan.
Try to pay down the extended part of your loan in less time than you would have done previously. This should be possible
because you are paying a lower interest rate.
Also cutting up your credit cards and closing the accounts removes the
temptation to get into more debt. Instead of Credit Cards, put some cash in a term or savings account for emergencies.
Check out this debt consolidation calculator which will show you how much time and money you could save by paying off your debts using the "rollover" method.
Read this article on The Pro's and Con's of Debt Consolidation
to get a better understanding of the advantages and disadvantages involved. Here is another article that explores
Is A Debt Consolidation Loan Your Best Option?.
It is well worth reading before talking to a bank or broker.
Tips and strategies
Get rid of Credit Cards. Cut them up and close the accounts, or live to regret it! Banks in Australia love to hand out Credit Cards,
and if you already have one, they try to get you to increase the limit. Don't do it!
Have a Cash nest egg for emergencies.
Increase the new repayment amounts so that the non housing components are paid off as per their original schedule or sooner.
More information on debt consolidation strategies...
Debt Consolidation - Example Rates and Fees
Variable Rate Mortgage in Australia NO FEES (Feb 2009):
- Monthly fee NIL
- Annual fee NIL
- Redraw fee NIL
- Extra Payment fee NIL
- Fixing fee NIL
Low Rate 6.97% std. variable discount
CCR 7.08%*
*Based on $250,000 over 25 years.
Debt Consolidation Example:
| Home Value |
$315,000 |
|
| Mortgage |
$ 200,000 |
@ $1,274 per month |
Personal Loan |
$15,000 |
@ $379 per month |
| Car Finance |
$15,000 |
@ $379 per month |
Credit Cards |
$10,000 |
@ $500 per month |
| TOTAL DEBT = |
$240,000 (has to be less than 80% of house value) |
@ $2,532 per month
|
| |
|
|
| AN ALTERNATIVE CONSOLIDATED
LOAN |
| TOTAL DEBT = |
$240,000 |
@ only $1,431 per month |
A saving of
over $1,100 per month or $13,200 per annum. |
You can apply over the Internet and ask echoice Home Loan Club for a free
no-obligation quote on a debt consolidation loan. Take this information and use it to develop a plan to reduce your debt.
Thank you for visiting our Debt Consolidation - Australia web-page. We hope the overview has proved useful.
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