It’s no news that home loan rates are at a historic low. But, did you know that you could take even more of an advantage of these rates by refinancing? Specifically if you refinance to consolidate debt?
In this article, we’ll talk about:
- The main benefits of debt consolidation
- The potential downsides
- Other factors to consider
Consolidating your debt is sometimes advised against. It turns your short-term debt into a long-term one, and can make it easier to overspend your means. This means despite interest rates being lower, the amount of interest accruing on your debt could grow substantially. However, if you’re careful and plan your budget well, refinancing to consolidate debt could make it easier for you to be debt free sooner. Here are the two main reasons why:
1. One loan, one repayment
Consolidating your debt into one loan (your home loan), means you’ll only have one monthly repayment to make. This reduces the chances that you may forget to pay for various loans. Also, removing any extra account keeping fees, costs and late charges you may have had to pay.
2. Lower interest rates
Smaller loans such as credit card loans or personal loans often have higher interest
rates due to the fact that they are unsecured. Whereas banks can hold your property as security, credit card lenders have little assets to liquidate if you get into credit card debt. Individuals are also more likely to pay late or not pay at all, increasing the risk for the lender. Charging a higher interest rate compensates for that risk and gives customers a reason to pay their debts on time.
Despite these benefits, consolidating debt won’t solve any underlying problems that may have gotten you into debt in the first place. Actively ensuring you have enough regular income to pay off your consolidated debt, that you aren’t overspending will help keep you on the right track. Commitment to lowering your debt is important because if you’re unable to service the new loan, you could be jeopardizing your home.
Other factors to consider include your current financial situation, your current credit score, and the costs of refinancing. If the costs outweigh the benefits, or you’re close to paying off your other loans, it might be better to pay them out and consider refinancing for reasons other than debt consolidation. All in all, it’s best to thoroughly assess your situation and ensure that consolidating your debt will save you money in the long run.
Not sure where to begin or what to calculate? Talk to us or schedule a consultation here!
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.