I often come across people who are using debt consolidation to get out of a debt faster. They have refinanced their mortgage to a lower interest rate and at the same time have ‘consolidated’ other higher interest rate debts such as Credit Cards, into their mortgage.
If you have used my DebtBuster software you will have seen the power of working at getting high interest rate debts paid off ASAP and ‘snowballing’ the repayment money from the smaller debts onto the highest interest rate debt as the smaller ones are paid off.
With debt consolidation you combine all your debts, both high and low interest rate, into one larger lower interest rate loan secured against something of value, usually your home.
This is a really great way of paying debt off even faster as long as you remember one important rule….
Do not fall into the trap of just making the requested repayments.
A $400,000 mortgage at 5% over 20 yrs costs $233,558 in interest
Roll an extra $50k into the loan and pay it off over 20yrs and the interest goes up by $33,000
Think of it like this… If you roll your Credit Card debt into a 20 year mortgage and only make the recommended payments, you will be paying heaps more for the Christmas 2015 purchases that went on your Credit Card than the purchase price and you will be doing so right up until 2035!
BUT…. If you add up all the repayments you were previously making on all the debts you had before consolidating and make that your repayment amount instead. You will smash your debt and pay heaps LESS in interest in the process!
Talk to your mortgage broker rather than your bank if you want to look at the possibility of consolidating debts. Your bank will only offer you their products whereas a broker will be able to offer you products from many banks.
If you do not have a mortgage broker shoot me an e-mail and I’ll see what I can organise for you. Maybe fill in the snapshot at www.simplybudgets.com.au/products/SnapShot.xlsx and send that to me as well but DON”T bother filling in all the expenses, just your Name, Income, Assets and Liabilities.
If you don’t own a home so can’t consolidate using a house as security it is usually harder to get someone to lend to you at a substantially lower interest rate so using the DebtBuster strategy is where you need to start.
Debt Consolidation Summary
PROS… Reducing the Interest rate you are paying on your high interest rate debt can make a huge difference to how quickly you can get out of debt.
CONS… The worst thing about Debt Consolidation is if you don’t qualify!
Also, refinance charges may dampen the benefit slightly but if you are getting a 21% Credit Card debt down to 4% that should fade into insignificance very quickly if you keep making the higher payments.
TRAPS… The biggest trap is to go and plunge yourself BACK into more debt by filling up those Credit Cards that just got paid off when you rolled the debt into your mortgage. – CUT THE CARDS UP OR REDUCE THE LIMITS TO JUST A FEW HUNDRED DOLLARS!
TIPS…. If you refinance to a lower interest rate, make the same repayments you were previously making on all your individual debts. You will get out of debt much faster.
That’s all for today.