Debt Consolidation Pro’s and Con’s
Debt consolidation, is the process of taking multiple debts that a person may have and rolling them all into one. There are many plus points to doing this but there are negatives that go with debt consolidation to. Hopefully by the end of this I will have shed some light on some of the different aspects of Debt consolidation.
So where to start. Normally people will start looking at consolidating their debts for a few different reasons. Two of them tend to stand out though, one being convenience and the other being saving money. On the first point it can be painful and confusing having to monitor a number of different debts. For example, let’s say we have a family who have their home loan and on top of that they have a personal loan with another lender and two credit cards that they are paying off at the same time. It is sometimes a lot more convenient to take the two credit cards and the personal loan and refinance them into the home loan. Meaning instead of having to pay different lenders different amounts every month, it is now all sitting under the one loan, with one monthly repayment.
That leads into the second part of this, and that would be possible savings. Sometimes when a person’s credit cards or debt levels have gotten out of control. Debt consolidation may be a way of relieving pressure and getting on top of that debt if managed correctly.
Again take the scenario of a family that has a home loan , two credit cards and a personal loan. The credit cards have outstanding balances and are now incurring interest, interest levels can be in the high teens when it comes to rate. In a case like this that family might be cash poor at the end of each month after paying all of these debts.
Here if managed correctly debt consolidation can help. So a person goes and refinances the re current home loan and now uses the equity that they have in their home to refinance the credit cards as well as the personal loan. So now instead of having a credit card debt and personal loan debt it all sits under the home loan. You are now effectively paying the credit card debt and the personal loan off over 30 years let’s say for arguments sake instead of 1 year and 5 years respectively. So what happens, your monthly payments are a lot less freeing up cash flow.
Here though is where the big Con is for debt consolidation at the same time though, and it is here where I put in the big WARNING sign. Remember I said if managed correctly debt consolidation can help. You have now taken your credit card debt and personal loan debt and while the repayments are lower , you have effectively stretched it over 30/25 years and you are paying a low home loan interest rate. If however you are going to pay that debt back over that time it will cost you a lot more than what you initially would have paid. So the secret is to take some of the money that you have freed up monthly and put it to use paying the home loan down quicker. If you do this there is a good chance you will get on top of the debt ,and not be under so much financial pressure. Another pitfall to watch out for is that you are not tempted by the fact that you have paid off the credit cards by refinancing them and go out and rack up debt again.
So debt consolidation can be used as a tool if used correctly and common sense prevails.
This Blog piece is not meant as financial advice and is general in nature. Everybody’s financial circumstances differ you should take your individual circumstances into account.
At Castle Mortgages we are always happy to help you with your debt structuring or any other financing needs you may have. We are an Adelaide based company and our door is always open for a coffee and a chat. Get in touch with us today!
Written by Nolan Parodi