It’s that time of year when we spend up big – buying presents for our family and friends, eating out, decking the halls with Christmas decorations and even going away on holidays. This can be a very stressful time for those of us on a tight budget. And it can be particularly stressful if you already have debts that you’re struggling to pay down
If you’ve been worrying about how you’ll manage your debt repayments next year, then help is at hand. Debt consolidation is one of the services we offer and we can look at ways to help you to re-arrange your finances to make things more manageable and eliminate the stress.
Are you stuck in a credit card trap?
Few of us on a responsible budget waste money on unnecessary spending, but credit balances have a horrible way of building up over time. The higher your balance, of course, the more interest you have to pay and that’s where things can start to get stressful.
It’s not difficult to get to a point where reasonable repayments are suddenly just enough to make the interest repayments and do nothing to pay down the balance. Credit card interest can be as high as 20% per annum or even more in some cases, and meeting these interest obligations can cut deeply into your monthly income – which in turn causes you to use your credit cards and run up more debt.
If you have personal loans, car loans or have used store credit as well as your credit cards, then things can really start to become difficult. We call this kind of debt ‘bad’ because it is expensive and does nothing to help you build wealth for your future – as opposed to a home loan which is a ‘good’ form of debt because it helps you build wealth and equity over time.
What can be done to break the vicious cycle?
Once you get into a situation where a large proportion of your income is going on paying your credit card interest, it can be difficult to break the cycle. The answer is to consolidate or collect all your debts into one, giving you a single repayment that carries a much lower interest rate than your existing credit cards and other forms of ‘bad’ debt.
By consolidating your debt and organising a new way to finance it, you can also spread out your repayments over time and that also helps to reduce the amount of money that goes out from your monthly pay packet. This will mean that you can use your income to pay off your debt and support your lifestyle instead of spending it on huge interest repayments. You may even find yourself in a position to save some money!
Two ways we can help you consolidate your debt
The idea of debt consolidation is to take out a new, low-interest loan and use it to pay off all of your old high interest debts – like credit cards, store credit and expensive car loans. There are basically two options for this kind of debt consolidation:
- Refinance your home loan and use some of the equity to pay off your debts.
- Take out a personal loan with a lower interest rate to pay off your debts.
Home loan interest rates are currently the lowest interest rates available in Australia. Refinancing your home loan to consolidate your debts means taking out some of your equity and this will increase your home loan repayments. But as they will be spread out over a long period of time, and home loan interest rates are much lower than credit card interest rates, this should work to lower your overall monthly repayments considerably and help you to get ahead.
The other alternative is to take out a personal loan to consolidate your debts. Personal loan interest rates are several percentage points higher than the average home loan, but they are generally less than what most of us are paying on our credit cards.
In addition to lowering the amount of interest you have to pay, a personal loan will allow you to choose your loan term to spread your repayments out and make them more manageable. This kind of debt consolidation gives you the added advantage of seeing your actual debt being eliminated – at the end of the loan term your debt will be completely paid off and you’ll be debt free!
Give us a call – we’ll be glad to help!
If you’d like to talk to us about consolidating your debts, please don’t hesitate to give us a call now. Our aim is to help you to find a way to make your monthly repayments more reasonable and free up more of your income so you can live comfortably and worry-free.