Debt Consolidation, good move OR bad strategy?

Are you aware of what debt consolidation is? And how it can be used to improve your financial situation?

As your local mortgage broker, I see numerous scenarios on a constant basis that can be improved with a well thought out debt consolidation strategy.

BUT, note the word strategy! Do not view it as a way to solely improve cash flow. Unless your scenario is thoroughly calling for it and you risk losing valuable assets if not done, cash flow should not be your only objective.

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So, what is debt consolidation?

Simply put, it is the refinance of current debt, or multiple debts, to lower your monthly repayments and improve cash flow. Sounds great right? Well, it can be.

It can also cost you more in interest repayments than you would have done previously, and even with the extra cash flow, you still end up paying more.

How does this work?

If the loan amount is taken over a longer term, reducing your monthly repayments, then the interest capitalisation can outweigh the cash flow benefit, as you may end up paying far more interest over this longer term than you would have previously.

This is just one example of a poor debt consolidation strategy.

How can it be of benefit then?

Debt consolidation can benefit many scenarios, but you must have the right approach. By improving your cash flow with the consolidation, you must put as much of this cash flow back into reducing the debt. Done right, you should be able to pay out the debt quicker than you could have previously, and save yourself on interest charges.

 Here’s a recent example...

A client of mine came to me asking if i could help with his debt levels. They were getting away from him and he needed help to keep them under control.

He had vehicle finance, owing $25,000, with monthly repayments of $840

He also had 2 credit cards, with the total balance of $17,000 owing, with minimum repayments due of $630 a month.

We used a personal loan to help him consolidate all three outstanding debts, and reduced his monthly repayments by $702. That’s $8,424 a year!

This relieved his cash flow quite considerably, but I made it clear this was pointless unless he used as much of that cash flow to pay out this new debt as quickly as possible.

Thankfully he understands this and is on track to pay out the debt far quicker than before.

 So, could Debt Consolidation work for you...?

Call me to find out... 9472 0211 or visit us on our Facebook page.

Posted in: Tips

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