Q: I owe school fees totaling $10,000 and do not have the available funds to pay them off quickly. I can apply for another credit card or extend my mortgage but am concerned that this will just add to my long term debt. I need the funds quickly and believe I can fulfill the necessary requirements to get a new card or add to my mortgage. Which course would you take?
A: I am not a big fan of taking either course, though there are pros and cons to each depending on your circumstances and ability to repay the loan quickly.
If you’re able to pay off the credit card debt quickly or you can secure a card with zero-interest for a period of time, then a credit card may be a good short term solution if you can repay it quickly. However making only the minimum monthly repayments will extend your debt over a longer timeframe and mean you end up paying much more in interest. You also might be tempted to continue spending on the card if it’s available which will impact on your ability to pay down the amount outstanding.
One of the cheapest forms of interest is using your home loan, and if you’ve been making advance payments on your loan you may be able to redraw that money for your school fees. Remember, you can only redraw up to the amount of additional payments you’ve made, which might not be enough. Also, not all loans have a redraw option and some lenders charge fees to access the money.
If redraw isn’t an option, extending or ‘topping up’ your current loan might be. Home loans typically have a lower interest rate than credit cards, and if you split your additional amount from your main home loan and pay it off quickly then you may be better off.
Try not to just lump the extra money in with your mortgage and only make the minimum repayments because this will just stretch the loan out. If what you borrow also pushes your home loan back into the LMI territory, where you owe more than 80% of your home’s value, you will get back into costly Lender’s Mortgage Insurance territory.
Before signing up for something seek professional advice from your financial advisor or a mortgage broker.
I suggest you consider a third option, and that’s a personal loan. Personal loans have benefits including being able to provide a controlled means of repaying a debt as they are paid off quicker over a fixed term, minimising long term interest costs.
Also, personal loans have fixed repayments, which means the interest rate you pay and the loan term you choose are locked in to suit your budget, which helps set you on a path to repay your debt as quickly as possible.
Making smart choices about where you put your debt can make a significant difference in how much it ends up costing you.
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