January is typically the time of year when individuals assess their finances. After the fun season of gift-giving at Christmas, an endless list of events to attend, and hitting the Boxing Day sales, people often find themselves in a less than satisfactory financial situation, and are driven to researching methods of how to save money, or how to get yourself out of the numerous loans you may have taken out.
Debt consolidation is an option to consider if you feel you are drowning in personal debt. In simple terms, debt consolidation is the process of combining or consolidating several different debts into a single loan to assist in making repayment more simple.
The most effective vehicle for debt consolidation is to refinance these multiple loans into your home loan. This way, payments that might be at high interest rates over short terms will now be at a lower interest rate over a long term which can vastly reduce your overall payments. You must bear in mind that as the loan term is longer, the debt may end up costing you more if you choose to only make the minimum repayments.
We’ll use an example to help explain this.
Client X has the following:
• Home Loan $1,910 per month – $400,000 balance
• Credit Card $300 per month – $12,000 balance
• Credit Card $150 per month – $6,000 balance
• Car Loan $500 per month – $20,000 balance
• Total $2,860 per month total
If we consolidated all the debts into the home loan then client X would have the following:
• Home Loan $2,091 per month – $438,000 balance
From this example, you can see that the monthly payments have lowered by $769 per month. This can be advantageous for those who are struggling to meet their monthly commitments. This may not be a suitable option for those who can maintain their current commitments as the overall interest payable will be much higher due to the much longer loan term.
This is a very basic example; there are other fees involved in refinancing a loan that can impact on the above figures. The above figures are based on a 30 year term loan with an applicable home loan interest rate of 4%.
If you’re becoming overwhelmed with having multiple loan repayments each month, give Carbon Finance a call to see if we can assist in consolidating your finances to give you one simple monthly payment. Call (08) 9446 8588.