Today’s low interest rates can make debt consolidation a smart idea worth considering.
It’s amazing to think that the official cash rate is at its lowest level in 60 years. Who would have thought a few decades ago that home loan interest rates of less than 5% would be common, with some even now starting with a 3?
Today’s ultra-low rates are certainly something to celebrate. But there’s a catch.
Other types of debt charge 20%-plus
While your home loan rate may be wafer thin, chances are you’re paying considerably more on other types of debt. Your credit card for instance could be costing 15% – even 20%. A personal loan or car loan could have a rate of about 10-12%.
It doesn’t make good financial sense to pay rates this high at times when the official cash rate is at a historic low. In fact, in the current market, using your home loan to consolidate debts can be a real money saver if done sensibly.
The potential for big savings
Debt consolidation means folding a bunch of debts into a single debt – often a home loan which may have the lowest rate of other types of debt.
Consolidating your debts this way can streamline your finances. You will only need to make one regular repayment instead of juggling multiple repayments each month. There’s also only one loan and one set of statements and fees to deal with, and most importantly, you could pocket big savings.
Using your home loan to consolidate debt may lower the overall rate you’re paying. This flows through to reduced monthly repayments, and that means you may have extra cash to make additional payments on your home loan. This in turn can reduce the loan balance sooner providing further savings on overall interest costs. It’s like using savings to grow more savings, and it’s a very smart strategy.
Keep the debts separate
It’s important to split the debt from your main home loan so it’s on a shorter fixed term of say five or seven years. Then you can use the savings from your repayments to pay off that debt sooner. This is one way to get the most out of any debt consolidation plan.
Be careful to avoid lumping the debt in with your home loan and extending it over a 25 or 30 year mortgage term. That could turn a short term debt into a long term one so keep it on a shorter term and pay it off as quickly as you can to enjoy the full benefits of debt consolidation.
Do bear in mind, debt consolidation can come with costs so it’s essential to weigh up the outgoings versus the savings. If you’re not sure what’s involved, get expert advice from a financial adviser. Your local Aussie broker can also walk you through some debt consolidation options to help you decide if it’s right for your situation.
Did you consolidate your debt? How much money do you think it saved you?
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