Did your Christmas spending get out of hand this year? You are not alone! According to a recent news report, our 2018 Christmas spending binge is expected to leave us with a $29.7 billion credit card debt – that’s equivalent to $1,863 per credit card!
The good news is that mortgage and finance brokers don’t just organise home loans – we’re also fully qualified credit advisors. If you need help to get your debts under control, here’s some info that may help.
What is debt consolidation?
Pay day loans, credit cards, store cards and credit facilities like after-pay accounts often carry high interest rates that can eat up your income and make it difficult to pay off the debt.
Debt consolidation is a way of potentially reducing the amount of interest you pay, making your debts more manageable. Put very simply, the idea is that you take out a low-interest loan and use it to pay off all your high-interest debts, rolling everything into one loan.
What are the options?
There are a couple of ways to consolidate debt. You can:
Refinance your home loan
Refinancing your home loan could help you to access the equity in your home to pay off your debts. Basically, you take out a new home loan that is larger and you keep some of the money to pay off your debts.
Take out a personal loan
This involves using the funds from the personal loan to pay off all your other debts. This is a good option if you want to pay off your debts in a shorter time frame (which could potentially save you much more interest than refinancing your home loan).
What are the benefits of debt consolidation?
- It makes debts easier to manage
Instead of having to get keep on track with multiple repayments to multiple parties, debt consolidation means you’ll only have to make one convenient repayment.
- Potentially save money on interest
Different types of debt come with different interest rates. For example, credit cards usually have sky-high interest rates, as they are a form of unsecured debt. Home loans and personal loans, on the other hand, usually come with lower interest rates. That potentially means less of your money will be gobbled up by interest payments.
- Repayment flexibility
Debt consolidation gives you the option to spread your loan repayments out over time, which could make personal budgeting and repaying your debt easier. You may even be able to get a loan that allows you to make extra repayments and pay off your debt sooner.
To consolidate or not to consolidate?
Using your home loan for debt consolidation purposes is not necessarily right for everyone – it all comes down to your financial situation and goals. Some people, for example, may end up paying more interest on their debt over the life of the loan (25 to 30 years), even though the home loan interest rate is lower than a credit card.
What’s more, by turning your unsecured debt into secured debt (i.e. your home loan), you could lose your home if you default on the repayments. For these reasons, it’s important to speak to a professional credit advisor before proceeding.
Are there other options?
Absolutely! If debt consolidation isn’t right for you, we may be able to suggest other ways to manage your debt – like creating a budget and repayment plan, for example.
If you’ve blown the budget this Christmas, it’s important not to panic. There are many ways to regain control of your finances, so get in touch. If you think your debt levels may affect your capacity to make your home loan repayments – don’t wait! It’s important to get things under control before you miss any repayments. Please call your finance broker today!