Wednesday, July 23, 2008

Cut your repayments

ABS statistics show that Australian household debt is at record levels with many people paying high rates of interest, particularly on credit cards.

If you have debts, especially those with very high interest, you might be considering debt consolidation as a way to provide some relief. This strategy can have the benefit of saving you money and making it easier to track and control how much you owe but only if you approach it with the right frame of mind and the correct loan structure.

When it comes to consolidating your debts there are a range of options available. Which one is the most appropriate for you depends on your individual circumstances and factors such as whether you own a home, the nature and number of your debts and your overall financial situation. Working through all your options and taking everything into account can be complex, but very rewarding.

One of the most cost effective ways of consolidating debt is to use the available equity in your home – Rolling your entire consumer debt into a single loan repayment. This can reduce both the repayment amount and the overall interest rate charge. However, in doing this you must be aware that you are probably extending the repayment terms of what was otherwise short-term debt. Any personal loans you had, difficult though they may be to pay now, would have been taken over terms like 3, 5 or 7 years. By putting this debt into a mortgage you will now pay off these amounts over 25 or 30 years. This means that you while you will be paying a lower interest rate, you will pay a lot more interest on the original debt over the term of the loan.

A potential way to avoid this is to structure the loan so that your original property mortgage and the new, consolidated debts are separated through a split loan account. Many banks can offer this facility in one way or another without any increased costs. This will allow you to continue to pay your mortgage at the original amount so it will clear in the least time possible (at least within the original loan term). You can also pay your consolidated debts at the lower mortgage interest rate but with a repayment amount that will allow you to clear this debt at somewhere near an acceptable 5, 6 or 7 year term.

And really, if you are prepared to commit to paying something like the amount you were obligated to before you consolidated the debt, you will pay this new loan off in 1,2 or 3 years.

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