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Great Way To Reduce Interest

Great Way To Reduce Interest

This excellent article clearly demonstrates how much can be saved by consolidating debts such as credit cards and personal loans into a home loan. It uses a case study to explain the before and after scenarios for a person who has a high level of debt.

There are so many opportunities to borrow money these days, is it any wonder many of us fall under the spell of “have it today, pay for it tomorrow”, especially when the interest deals are so attractive? Unfortunately some people get carried away and soon find themselves with so many loans and mounting interest. An excellent way to manage this predicament is “debt consolidation”.

This practice combines existing debts into one easy-to-manage loan with just one regular repayment. In doing so, you have the opportunity to reduce your regular monthly payment amount (either through a lower interest rate or longer loan term), or to reduce your loan term and save on interests costs. Consider the following example.

Jenny currently has the following debts that she is struggling to pay.

Before consolidation
Credit Type Interest Rate Initial loan amount Loan Term Balance Outstanding Regular monthly repayment
Home Loan 5.0% $300,000 14 years $210,000 $1,753
Personal Loan 12.0% $20,000 5 years $18,000 $445
Credit Card# 20% $10,000 $8,500 $255
Store Card# 28% $3,000 $2,300 $115
$238,800 $2,568

# Assumes minimum payment of 3% on credit card with a term of 21 years and 10 months, and a minimum payment of 5% on the store card with a term of 9 years and 7 months.

After consolidation into home loan – reduced interest rate and increased term##
Credit Type Interest Rate Initial loan amount Loan Term Balance Outstanding Regular monthly repayment
Personal Loan 5.0% $28,800 5 years $28,800 $544
Personal Loan 5.0% $28,800 7 years $28,800 $407
After consolidation into home loan – retain current payments##
Credit Type Interest Rate Initial loan amount Loan Term Balance Outstanding Regular monthly repayment
Personal Loan 5.0% $28,800 3 years & 3 months $28,800 $815

## Assumes money is borrowed against equity in home to pay out existing high interest loans.

By consolidating her debts into her home loan using a sub-account facility at a lower interest rate, Jenny is able to reduce her repayments by $271 per month on a five-year loan, or $408 per month on a seven-year loan. Alternatively, should she choose to continue her current repayments, she will be free of her non-mortgage debt in just three years and three months.

Whichever option suits your circumstances, debt consolidation might help you to better manage your money and your time. Always consult a licensed adviser to guide you.

Sources:

www.canstar.com.au/interest-rate-comparison

www.infochoice.com.au