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.
Showing posts with label personal loans. Show all posts
Showing posts with label personal loans. Show all posts
Wednesday, July 23, 2008
Thursday, June 19, 2008
The cost of a little discipline
A personal loan may be more costly than home loan rates but they have the advantage of instilling discipline in certain borrowers when purchasing consumer items.
Consumer finance is by definition, finance for items that get consumed - things that get used up or wear out. It would be perfect if we could always access the cash when we needed it to buy these kind of items.
When you're looking at a new car, holiday, boat or other worthwhile purpose, the cheapest way to get it is to save. But when these items cost upwards of $20,000 saving might not be an option.
Borrowing for consumer items using credit that operates on a revolving basis, like credit cards or some home mortgages has its advantages. But when it's used by borrowers with limited or fixed income, often the principal remains unpaid for years or never gets paid off at all.
When you do need to borrow for consumer items a personal loan might be the best option. A personal loan allows you to access goods and services now, that you might not otherwise be able to take advantage of if you were forced to save. The repayment of the loan, both principal and interest is required to be made over a specific period of time, usually one to seven years.
Borrowing for consumer items can make good sense. If your car is older and is in need of constant maintenance and is costly to run, there may be good financial reasons to borrow funds for a newer and less costly vehicle. The running costs alone might be preventing you from saving any money towards a new vehicle. However, before you consider borrowing on this basis ask yourself a few questions first. Do I really need the item? Would it be possible to get something a little less expensive and save for it? Also consider the consequence additional debt will have on other financial goals you may have. If you are a first homebuyer looking to enter the mortgage market, it might be better to defer the decision to borrow for an overseas holiday until you are in your new home.
The simple fact is that some people do need the discipline of a certain payment every month for a set period of time to pay things off - and there's a lot to be said for that. But if you're on a higher income and you have the discipline and can afford to service new debt, then you've probably earned the right to make the choice to "consume now and pay later"
Consumer finance is by definition, finance for items that get consumed - things that get used up or wear out. It would be perfect if we could always access the cash when we needed it to buy these kind of items.
When you're looking at a new car, holiday, boat or other worthwhile purpose, the cheapest way to get it is to save. But when these items cost upwards of $20,000 saving might not be an option.
Borrowing for consumer items using credit that operates on a revolving basis, like credit cards or some home mortgages has its advantages. But when it's used by borrowers with limited or fixed income, often the principal remains unpaid for years or never gets paid off at all.
When you do need to borrow for consumer items a personal loan might be the best option. A personal loan allows you to access goods and services now, that you might not otherwise be able to take advantage of if you were forced to save. The repayment of the loan, both principal and interest is required to be made over a specific period of time, usually one to seven years.
Borrowing for consumer items can make good sense. If your car is older and is in need of constant maintenance and is costly to run, there may be good financial reasons to borrow funds for a newer and less costly vehicle. The running costs alone might be preventing you from saving any money towards a new vehicle. However, before you consider borrowing on this basis ask yourself a few questions first. Do I really need the item? Would it be possible to get something a little less expensive and save for it? Also consider the consequence additional debt will have on other financial goals you may have. If you are a first homebuyer looking to enter the mortgage market, it might be better to defer the decision to borrow for an overseas holiday until you are in your new home.
The simple fact is that some people do need the discipline of a certain payment every month for a set period of time to pay things off - and there's a lot to be said for that. But if you're on a higher income and you have the discipline and can afford to service new debt, then you've probably earned the right to make the choice to "consume now and pay later"
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