Wouldn’t it be great if you could get rid of your debts faster and pay less in the process. It can be done but you need to understand that a new debt consolidation loan is not necessarily the answer. You have probably taken some years to accumulate your current level of debts and it can also take a number of years to pay them off.
Reduced payments vs lower cost
When trying to choose a direction with debt reduction you need to make an initial decision as to what comes first. Are you trying to reduce your set repayments as much as possible or are your looking to save interest costs over the life of your debts. Sometimes one comes at the cost of the other.
For example you may be able to save hundreds or even thousands of dollars in annual repayments by consolidating hefty unsecured debts into your mortgage. This strategy takes your expensive short term debt and places it into a cheaper long term debt. While your monthly repayments are likely to become more affordable, you will probably pay out much more to the bank over the life of your mortgage. If you can afford larger repayments then you should consolidate into the mortgage simply to reduce your monthly interest expense however the savings should be applied to reducing the loan principal.
Credit Card Debts
The cheapest and easiest way to reduce credit card debts is via a zero interest credit card debt rollover. While you can consolidate outstanding card debt into a cheaper loan, why do so when card providers make it possible to pay no interest on your debt for up to 12 months? Once you have used the debt rollover strategy a couple of times with each of your cards you will see significant savings and debt reduction.
Other unsecured debts
It may be possible to save a little by consolidating unsecured loans into a secured one. The saving in terms of interest costs is not likely to be very significant. However if you need to reduce payments to make them more affordable then having a longer loan term can offer the payment reduction. This will not reduce your cost of debt overall only the periodic payment amount.
Secured debts
Secured debts such as your car loans or your home loans can be refinanced to a cheaper lender. However your existing loans may place restrictions as to when you are allowed to refinance. If you are in a fixed loan then there maybe substantial penalties resulting from trying to take the loan elsewhere.
Loan Term
Your loan term tends to define your loan costs. If your mortgage is to be paid out over 15 years at 6.5% then the overall loan costs will be lower than a more expensive mortgage at say 7% but over 25 years.
Does this mean that you should take a mortgage over as short a period as possible? Not at all. There s nothing wrong with a 30 year mortgage. You can take this loan and repay your home in 15 years. This is done by making extra principal payments outside of the payments set in your loan agreement.