Are you looking to consolidate your debt?
If so, it’s important you are clear on why you are doing this, understand the options available to you and ensure that by doing so you don’t end up with more debt!
- New Home Loans
- Reduce Payments
- Manageable Solutions
Pros and Cons of Debt Consolidation
Debt consolidation can be useful if you are juggling multiple debts such as a personal loan, car loan and a few credit card balances. It can also be a trap if you continue to build debt after you have completed the consolidation. Here we look at what to watch out for as well as the benefits of of debt consolidation.
What to watch out for:
- If this is not your first time consolidating debt, this may be an indicator that you need to look at an overall financial management plan to help you manage your money.
- Is this a band-aid solution? Do you need financial assistance?
- If your loans are in arrears you may need to use a non-prime lender. This could cost you more as they may have higher interest rates, application and exit fees.
- In some circumstances, negotiating with your existing creditors may be a better option vs. consolidating the debt.
The key benefits can be:
- Easier management of one loan.
- Reduced paperwork via one set of statements each month.
- Convenience of dealing with one lender instead of many.
- Repayments are easier to manage.
- Reducing the interest rate paid on the debt.
- Potential savings on your overall interest charges and monthly repayments.
- Savings on loans fees and charges.
- A clear timeline on when you will be debt-free.
And lastly (hopefully) it reduces stress!
When consolidating your debts into your home loan you have an added consideration to place into your decision matrix. Obviously getting the right home loan for your needs is paramount, however it’s also important to ensure the security of your home and not put this asset at risk.
If you’re looking to add debt consolidation as a variable of your home loan, the following loan types may be relevant to you. If you want to chat to someone, you can also give us a call on 1300 135 456, use web chat or fill in our contact form and we’ll give you a call when it’s convenient to you.
A split loan is actually not a loan type but a loan feature. Typically a split loan is used when you want to split your mortgage into two – with one portion a fixed interest rate and the other a variable interest rate loan. This feature gives you both security of a fixed rate loan and the flexibility of a variable rate loan and can be customised to your needs. It can be used when consolidating your debt, as you may want to place the debts you are consolidating into the fixed interest rate portion so that you know each month what your repayments will be. This also allows you to know exactly how much interest you will pay on this debt over time.
A variable rate loan is the most common loan type used when financing or refinancing a property. As such it is likely this will be a loan type you will investigate. This is where the interest rate on the home loan fluctuates over time as market interest rates change. As a result, your monthly payments will vary over the term of the loan. You will need to ensure you either have enough equity in your current loan to cover the debt being consolidated, or a loan-to-value ratio (LVR) that meets your lenders requirements.
Ask a Broker
If you are looking to consolidate your debt through your home loan there are a number of questions you should ask your broker to ensure this is the right path for you.
Alternatively if you are struggling with debt it may be a good idea to chat to a financial counsellor or get legal advice to help you sort out your money overall – there are free services available. Go to moneysmart.gov.au, nationallegalaid.org or call the National Debt Helpline on 1800 007 007. It’s best to avoid doing nothing!
- How much debt are you looking to consolidate?
- What type of debt do you have? Do you have credit cards, store cards, personal loans or a car loan?
- What are the home loan options available?
- Should I set up a split loan?
- What is the best loan structure for me?
- How much equity can I use from my home to consolidate debt?
- Can I get a copy of my credit report?
- What will be the difference in interest I pay with a consolidated loan vs. my current debts?
- How much interest will I pay?
- How long will it take to pay off this debt?
- What will the fees be?
- Am I able to make additional payments to reduce the debt faster?
- What paperwork is required?
- How long will the process take?
To prepare for your discussion with your broker, there are also a number of questions you should ask yourself. This will help to find the right solution for you.
- Why are you looking to consolidate your debt?
- What is the amount of monthly debt payments you are currently making?
- Are you up to date on your repayments?
- Are these payments manageable or do you need to reduce them?
- Do you know the interest rates and/or the terms of your current debt?
- Do you have a debt plan?
- Have you sought financial advice?
- Are you looking to refinance a current home loan? If so, what is your current equity, loan amount, interest rate and lender?
- Is your current home loan in your name or joint names? If joint names, has the other party given their okay to consolidate the debt via refinancing?
- Are you purchasing a new property? If so, what are the property costs and what is the amount of debt you want to roll into this home loan?
- Are you prepared to cut up your cards once you’ve paid them off?
- Do you need the money by a certain date?
- Are there any personal circumstances the broker needs to be aware of? Unemployment, sickness or injury? Are you starting a family?
Debt consolidation – Debt consolidation is the process of taking multiple smaller debts and folding or consolidating them into a single loan. This can typically be achieved via your home loan, a personal loan or by a balance transfer on your credit card.
We look forward to discussing your home loan needs soon.
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