What is debt consolidation:
Debt consolidation is a financial strategy that generally involves combining multiple debts into a single, larger debt with the goal of simplifying your finances and often reducing your overall repayments. It's typically done by taking out a new loan which is used to pay off existing debts.
Case Study: Kate and Williams Debt Consolidation
Background:
Kate and William are a professional couple in their mid-30s who had accumulated various types of debt over the last 2 years. The couple had a $10,000 credit card balance with an interest rate of 20%, a $20,000 car loan with a 9% interest rate, and a $15,000 personal loan with a 12.9% interest rate. They also had a mortgage of $500,000 that was coming up for its fixed-term renewal.
Situation:
Kate and William were finding that their monthly minimum payments were becoming increasingly challenging to manage, and they were concerned that when their mortgage fixed-term interest rate period ended they may struggle to service everything.
Their combined other debt payments per month totaled $1056 excluding their mortgage repayments.
Debt Consolidation Plan:
Kate and William enquired about the option of consolidating all their other debt into a shorter-term mortgage. Their goal was to lower their repayments and make it easier to manage one payment compared to three.
Result:
Kate and William consolidated their debts into a 10-year mortgage making their repayments more affordable. Kate and William however acknowledge that it has been recommended that once their cashflow position improves and interest rates lower they should pay off this mortgage before its term-end date.
Their new repayments for their consolidated debt are $522 per month compared to the $1056 per month they were paying. This is a saving of more than 100%
and these additional savings have now gone towards helping with their increased mortgage repayments.
Summary:
Debt consolidation can be a great way to tidy up some of your financial commitments and make payments more affordable. The key is to avoid building up another round of higher percentage debt repayments and repeating this process.
In cases where a mortgage top-up or restructure is unavailable due to Lenders' high-test rates, or your circumstances simply don't match the criteria there are still other options to help simplify and consolidate your debts.
Give us a call if you would like to explore these options……
We take calls over the weekend 027 472 52 44 Sara Hartigan