What do I need to know about debt consolidation? Not to confuse it with debt elimination. If youre swamped with credit card debt and personal loans, it can sometimes help to talk to a professional about debt consolidation. However, you need to be wary. You might end up paying more in the long term and/or reduce the equity in your home. What is debt consolidation? Debt consolidation is where you transfer your credit card debt and any personal loans to your mortgage. The advantage of doing this is that the interest rate on your home loan is likely to be lower than youre paying on your smaller debts. You might also benefit from a regular manageable repayment. However, there are some things you need to be aware of. Debt consolidation is not debt elimination Since debt consolidation clears the debt from your credit cards, the temptation is to think that youve paid off the debt. But you havent. Youve merely transferred the debt to your mortgage. So, once youve consolidated your debts, consider snipping your credit cards in two. Otherwise, you could get trapped in a debt spiral. Remember the 80% LVR threshold When you took out your mortgage, you might have been under the 80% loan to value ratio, which meant that you didnt have to pay lenders mortgage insurance. Be careful when you consolidate your debts that you dont reduce the equity in your home and have to pay lenders mortgage insurance. Personal loans arent tax deductible Interest charges on an investment loan are tax-deductible but interest on a home loan isnt. When you consolidate your debts, you need to be mindful of how much interest you can claim as a tax deduction. Seek advice from a tax agent before making a decision in this area. Financing Short Term Debt Long Term Over the long term your home is likely to appreciate in value. In this sense, it generally makes sense to fund long term and you benefit from lower monthly repayments. Despite a reduction in interest rate, refinancing a car loan or even credit card debt, say over 25 years, could potentially see you paying significantly more interest if the existing loan terms where for example 5 years or less. In some cases, the increased term of the loan could off-set any benefits of a reduced interest rate when it comes to interest costs. Proper assessment by a credit advisor should take place to avoid this trap where possible. To learn more about debt consolidation, contact Fair Share Financial today. Credit Representative Number 441707 is authorized under Australian Credit Licence number 389328.
Posted on: Mon, 08 Dec 2014 04:19:00 +0000
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