Debt Consolidation

What is Debt Consolidation?

Loan Calculation

Debt consolidation is one of the most effective and practical methods for reducing cash flow pressures. Families today are under enormous pressure to meet the demands of rising housing costs, rising utility costs and higher interest rates. Our premise is that you don’t need to spend hours every month juggling repayments, stressing over the bills when you can consolidate your credit card debts, your personal loans and your store credit card loans into a mortgage-linked debt consolidation loan. Consolidating your high interest loans and credit card debt into a single loan with a lower interest rate and more manageable payments makes perfect sense.

Debt consolidation can be a risky proposition and many consumers who consolidate their loans end up paying far more than they would have otherwise. But it is only risky if it is unplanned. It requires some careful planning, exploring your options and proceeding with caution.

If you have a mortgage and you also have multiple personal debts you will find that a mortgage lender, either a bank or a credit union, will usually be able to offer a practical debt consolidation solution without the exorbitant fees associated with other types of loans. They may even offer you an opportunity to look at refinancing your home at a better interest rate. And that will save you money.

How they work

Debt consolidation loans which are secured loans backed by the home can be arranged through your mortgage lender and are designed to allow you to pay off a number of smaller loans such as credit cards debts, personal loans, store cards, car loans or leasing debts through a loan facility provided by the mortgage lender.

In practice a debt consolidation loan is a secured loan such as a second mortgage, a secured line of credit, or a home equity loan. The bank or credit union will usually create a facility which enables you to clear (consolidate) the smaller debts into a single loan. The loan, if secured, will usually be at a considerably lower rate of interest than the individual debts. The facility will require security documentation to be prepared and there will usually be a fee as associated with this. Click here for more information.

Benefits of debt consolidation

Lower interest rate than unsecured loans such as credit cards because the lender has the security of the property.
Monthly repayments are reduced. If you are paying 19% on a credit card (or two) then a line of credit or home equity loan is usually charged out at the standard variable rate of inertest on home mortgages which is around 7%. The differential ands savings is hence significant. And if there are multiple debts then the differential and savings are even higher.
Your risk of missing payments and hence incurring late payment fees are reduced. Indeed as the loan is with the same lender as your mortgage, you will have the benefit of transferring from one account to another without needing to juggle between different institutions and having multiple statements to labour over.
A debt consolidation strategy will give you the opportunity to take a good look at your spending and become more conscious of spending within a budget and balancing your spending so you don’t continue to dig yourself in. To illustrate this, when researching your debt consolidations strategy you will find online calculators with which you can compare the cost of your current debts with the cost of a consolidation loan. This can allow you to carefully budget to the new monthly repayment.
Multiple credit cards and personal loans will result in multiple annual fees and these can be minimised by having a single lender with a linked account between the home loan and the debt consolidation facility.
Debt consolidation reduces the uncertainty of your financial position. By consolidation a number of smaller debts into a debt consolidation loan you know exactly how much you will be repaying each month thus alleviating the fear that you will not be able to meet repayments and credit cards which are a variable debt.