Debt refinance is the new black. We hear it on the radio, see it on television and read about it in the printed media. Refinance, consolidate and save.
The problem with this message is that few borrowers know how to assess whether the refinance or the proposed consolidation is overall worthwhile for them. Will proceeding actually save you money in the long run or is it like a low start loan, that seems very cheap to start with but will cost you thousands more than you need to pay in the long run? Therefore they turn to loan professionals who appear to be independent but are in most cases looking to sell you a good or a service. It is up to the borrower to assess and understand their true position.
Lower rate is not enough
If you are looking to save money with a debt refinance you should know that there s more to making a decision to refinance than the interest rate alone. You also need to consider the flexibility of the new loan and whether you are simply postponing the inevitable. Sometimes it is better to sell up and pay down at leas some of the debt rather than look for a refinance alternative. We have seen borrowers move from 65% mortgage to 85% mortgage in an attempt to consolidate and draw money out to cover debts. What will these people do when the equity they require to consolidate built up debts is no longer there. Many Aussies are spending beyond their means at a rate that is much higher than the anticipated growth in the equity of their property.
Borrowers should consider if a lifestyle change or a spending change is in order before proceeding with a debt refinance.
For example you can save money on credit card debt by rolling that debt from a 18% credit card to a 0% for 12 months card. However unless you stop using the card for any further purchases during the 0% term – you will not save any money – only incur more debt.
Are you sufficiently disciplined ?
Credit Card debt can be rolled over to a 0% card, however to reduce debt and save money you would need to be disciplined enough to pay down this debt during the 0% term. If you do not this refinance of debt may be a waste of time.
Similarly a borrower who decides to consolidate unsecured debt into their mortgage, may reduce their month debt repayments but will not save money over the life of their mortgage unless they actually make effort to repay the consolidated debt.
Consider the overall cost over the loan term
It is not enough to see that your debt payments have been reduced today. In working out the cost of a debt solution one also needs to estimate what the refinance/consolidation will cost the borrower over the loan term. Increasing the loan term by another 10 years may reduce repayments but will cost a lot more over the loan term.
Debt help without borrowing
Not all forms of debt assistance require you to take out a new loan so as to pay down old debt. Speak to one of our debt specialist to find out what debt solutions may be available to you.