| mortgage, debt consolidation | 11 Aug 2008 11:00 PM |
| Drowning in Debt! Why not think about debt consolidation? by Michelle Kour | |
A few years back prior to buying my first home, I bought my first car and also at around the same time applied for my first credit card. Whilst this was my only alternative at the time due to a lack of savings, it wasn’t such a big deal as it was my only financial commitment. Things have now changed and with the rising home loan interest rates, I have suddenly found my overall level of monthly repayment commitment on all my debt is causing a problem with my cash flow. So who did I turn to?
I approached my home loan lender for a solution and they recommended debt consolidation. Sounded good to me, but what is debt consolidation? The first thing I needed to have before I could look at debt consolidation was equity in my home, which fortunately I did have. What my lender was basically going to do was to pay out my car loan and credit card and roll these amounts into my home loan. There were two reasons why debt consolidation was the right option for me, the first being because it meant that I had all my debt with the one financial institution which made it easier to keep tabs on and secondly (and most importantly), it substantially increased my available cash flow each month. Due to the fact that the home loan is a secured loan against my home over a thirty year period whereas the credit card and car loan are both unsecured and repayments are calculated on a much higher interest rate and shorter loan term (car loan that is), my monthly repayments were far less per month.
This all sounded too easy to me so I needed to ask my home loan lender what were the downsides of debt consolidation? As you are paying less per month but over a longer period of time, you in fact are paying more in total interest over time. I was able to maintain my repayment commitment most of the time, which meant that I was paying more back into my loan that I needed to. By doing that I was able to draw on those “additional” funds at times where things got a little tight. It seemed to me as cash flow was my biggest concern that the pros certainly outweighed the cons and debt consolidation was the right choice for me.
In summary, debt consolidation is an option available primarily for anyone who is looking for an improved cash flow. Other factors such as limiting the number of lenders you deal with for bookkeeping convenience and perhaps ridding yourself of that dreaded “maxed up” credit card should also be considered. So if you find that you are struggling to ‘keep your head above water’ in the current climate, then debt consolidation is something you should seriously think about. Have a chat to your home loan provider and see how debt consolidation could help you.
I approached my home loan lender for a solution and they recommended debt consolidation. Sounded good to me, but what is debt consolidation? The first thing I needed to have before I could look at debt consolidation was equity in my home, which fortunately I did have. What my lender was basically going to do was to pay out my car loan and credit card and roll these amounts into my home loan. There were two reasons why debt consolidation was the right option for me, the first being because it meant that I had all my debt with the one financial institution which made it easier to keep tabs on and secondly (and most importantly), it substantially increased my available cash flow each month. Due to the fact that the home loan is a secured loan against my home over a thirty year period whereas the credit card and car loan are both unsecured and repayments are calculated on a much higher interest rate and shorter loan term (car loan that is), my monthly repayments were far less per month.
This all sounded too easy to me so I needed to ask my home loan lender what were the downsides of debt consolidation? As you are paying less per month but over a longer period of time, you in fact are paying more in total interest over time. I was able to maintain my repayment commitment most of the time, which meant that I was paying more back into my loan that I needed to. By doing that I was able to draw on those “additional” funds at times where things got a little tight. It seemed to me as cash flow was my biggest concern that the pros certainly outweighed the cons and debt consolidation was the right choice for me.
In summary, debt consolidation is an option available primarily for anyone who is looking for an improved cash flow. Other factors such as limiting the number of lenders you deal with for bookkeeping convenience and perhaps ridding yourself of that dreaded “maxed up” credit card should also be considered. So if you find that you are struggling to ‘keep your head above water’ in the current climate, then debt consolidation is something you should seriously think about. Have a chat to your home loan provider and see how debt consolidation could help you.
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