Consolidate debt - save on interest payments

Again – we have all heard it all before............consolidate debt! But what does it actually mean and how much could you save.

Well the first thing to work out is what debt you have.

• Home Loan
• Personal Loan
• Store Card
• Credit Card
• Car Loan

Now – let’s think about interest rates on each of those. Generally speaking, a Home Loan will offer the lowest rate of interest – currently you could secure a rate of 5% - 6%. At the opposite end are Store Cards and Credit cards which can charge around 20%.

Personal and Car loans sit somewhere in the middle at around 10%-15%.

So – what next?

Talk to you Accountant and Financial Planner and work out if there is an option for you to consolidate all your debt into your Home Loan. You will need to have sufficient equity in your home and obviously there is a question of affordability, but your advisor will be able to work through those things with you in more detail.

The key to getting consolidation to work is not to fall back into the same trap – so if you are serious about reducing your debt, the first thing to do is cut up the credit cards!

Now lets do a few sums.

Assuming you have:

• 10,000 on a credit card at 20% - interest of $2,000 per year
• Personal Loan of $5000 at 10% - interest of $500 per year
• Car Loan of $20,000 at 9% - interest of $1,800 per year

Consolidate all that into a Home Loan at 6% interest and you’ll pay $2,100 annual interest.

That’s an annual saving of $2,200.

These are very simplistic examples and there are lots of factor to consider when consolidation debt, so make sure you talk to your Accountant and Financial Planner about the best options for you to save heaps on interest!