Debt consolidation
Debt consolication is a form of debt refinancing that offers the servicing of one loan to pay off a range of debts that you may be paying across multiple loans, lines of personal credit and more. Talking with a finance broker about your individual financial situation can help you to understand how consolidating your debt can bring down rate the interest you are currently paying and how servicing one loan can help to pay off your debt sooner, saving you money and debt stress.
Advantages Include:
- You’ll pay less total interest. Interest is essentially rent you pay a lender for the use of its money. The longer you keep the money, the more rent you pay. Why not reduce your cash commitments by lowering the overall rate you pay.
- You’ll be able to borrow more economically. Sometimes when lenders calculate the rate of interest at which you can borrow, they take into account the amount of debt you are currently carrying and your ability to repay it. High personal and credit card debts can make it easier for mainstream lenders to decline your application, pushing you into the non-conforming space which is more expensive.
- You’ll have greater credit to draw on. When lenders calculate how much you can borrow, they look at the amount of debt you have outstanding now and how much more you can afford to service, given your current income. If you have a big mortgage or a lot of credit-card debt and pay high monthly repayments, lenders will be wary of letting you borrow much more. As there is a direct correlation between borrowing capacity & current debt repayments, your capacity will increase when your repayments are lower.
- You’ll have better cash flow. By paying down debt, you’ll reduce the amount of your monthly repayments going forward. You’ll have more money in your pocket for current expenses and extras — and less need to borrow from high-interest lenders, such as credit card companies, for day-to-day needs.
- You’ll reduce your opportunity cost. You could put the money you’re paying in interest each month to better use if you pay off your loans. If you deposit the same amount in a savings account, you will earn interest. If you invest it in a home that appreciates in value or brings in rental income, you will make a capital gain when you sell or earn extra income while you are renting it out. You’ll be better off by the annual rate of return you make on your investment plus the annual rate of interest you’ve been paying on your loans.
Disadvantages Include:
- Can be a minefield in terms of credit policy. Your choice of lender here will be critical, get some good advice upfront