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Written by Juanita Wrenn – Managing Director
If you have more than one loan it may be a good idea to roll them into one consolidated loan. With such a low interest rate environment the benefits are incredible, all things considered.
Lets look at an example;
The Applebys have a mortgage of $500k paying Principle and interest at 2.14% pa with Maquarie Bank Basic Home Loan of $1,888 per month.
A $20,000, 8.99% p/a unsecured car loan with ANZ paying $428.18 per month.
21.24% with a CBA credit card, this is interest only but they are not paying any of the debt off. Current interest repayments are $1,699.20. The Applebys have $8,000 on the credit card from a sudden trip to Melbourne for a family emergency.
Total debt expense per month = $4,015.38
By combining the credit card debt and the car loan and securing the loans against the value of their house, the Applebys mortgage repayments only increase to $1,993 per month (they were $1888 per month). This is a huge savings and will allow the Applebys to pay this debt back twice as fast.
There are many advantages to consolidating debt, but there are also some things to be mindful of. It is very important for your adviser to understand the mindset of their client when consolidating debt.
Let’s start with the good things about debt consolidation. By rolling your debts into one loan, it can make repayments and budgeting a lot easier. It can also often reduce the interest rate payable, especially if you are rolling credit card debt against your home loan, where the interest rates are more favorable. This then allows you to reduce the interest you are paying each month. By continuing to pay the same repayments this will allow you to reduce your debt faster and will assist with budgeting and forecasting.
There are some things though that you and your adviser should consider before embarking on debt consolidation.
- Will you be more tempted to get deeper into debt if you get more credit?
- Will there be any fees involved in refinancing and what will your LVR (Loan to Value Ratio) be if you use your home to re-finance. Are there penalties for paying off your original loans early?
- If you do use your home as security, it’s important to ensure that you can pay back the loan as if you can’t your home may be at risk. This is why it’s important for your adviser to understand your cash flow and your mindset before consideration is given to consolidating your debt.
Getting on top of debt is the first step for many to financial freedom. The most important step is to make a conscious decision to make a change and start that change today. Once you make this commitment to getting your debt under control it is a matter of:
- Know what you owe – make a list of all your debts, and what the monthly repayments are.
2. Work out what you can afford to pay. This involves looking at your overall cashflow on a monthly basis, including taking into account annual bills on a monthly basis.
3. Now it’s time to look at what you have coming in vs what you have going out. If more is going out then is coming in, its time to look at what you need vs what you want. This involves prioritizing your debts.
5. Start a payment plan and start building a savings buffer.
Your Hudson adviser can help you to consolidate and prioritise your debt and look at the best way to move forward looking at your particular mindset. As with anything, the first step is to make a start.
If you feel that you are not ready yet to talk to an adviser, our Broker Associate Heather Ford can be contacted here.
Heather can help offer direction as to the best way to begin consolidating your loans into one and can keep an eye on you so that when you are ready to talk to an adviser to look at your longer term goals, Heather will be there to move you across to one of our dedicated financial advisers.