Consolidating your debts could give you a clearer picture of what you owe and potentially save you money, but there’ll still be things to look out for.
If all those small debts you once had, have somehow multiplied and grown into bigger debts, rolling them into one could help reduce what you’re paying in fees and interest.
If you’ve heard about debt consolidation and are wondering whether it’s the right option for you, we look at some of the tips and traps, so you’ve got a bit of info up your sleeve before you decide.
Debt consolidation is where you take your existing debts (credit card, personal loan, car loan, or all of the above) and consolidate them into a single loan, preferably with a lower interest rate.
Some people choose to use their home loan to consolidate their debt because it often offers a lower interest rate, but it does mean risking your home if you can’t keep up with your repayments.
Other options include rolling your debts into a new or existing personal loan, or credit card balance transfer.
Different options will have various pros and cons, depending on your circumstances, which is why it’s really important to do your research first.
1. Get up to speed with your current debts
2. Think about the best way to consolidate
Depending on your situation, one approach could be to roll all your existing debts and any savings you might have into your home loan, if you have one. This could potentially help reduce your short-term debt burden, because:
If you’re leaning toward consolidating your debt into your home loan, do keep in mind:
3. Focus on clearing debt
Sheri and Samantha, who are in their mid-30s, bought a $750,000 two-bedroom apartment in Sydney three years ago.
They were able to put forward a 20% deposit after several years of saving and some help from an inheritance.
Their financial situation today:
Sheri and Samantha speak to their bank about how they might consolidate their loans.
They agree on increasing the balance of their home loan to $577,000, so they can pay off their higher interest rate credit cards and personal loan.
Consolidating these into their lower rate home loan means they can reduce their total monthly loan repayments by $583.
If they put these savings into their home loan by keeping total monthly repayments at $3,319, they’ll reduce their home loan term by eight years and 11 months. This will save them $62,858 in interest.
|Payments per month
|Payments per month
Of course, there are factors that could affect this strategy – such as unexpected changes in interest rates, but you can see that Sheri and Samantha’s consolidation strategy could provide a substantial monthly saving – one that could eliminate their debt sooner or free up funds for other investments.
Please note: this case study is based on a typical situation to show the benefits of an effective debt consolidation strategy. There are always things to be aware of, many which we’ve listed above.
If you would like to make an appointment with our in-house Mortgage Broker Todd Davies to chat about which type of debt consolidation strategy might suit your needs simply phone the office on |PHONE| or alternatively, make an appointment directly with Todd by using his direct booking link here.
This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling |PHONE|, before deciding what’s right for you.
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