Debt Consolidation LoanHow to Save £1,000's
A debt consolidation loan is exactly that. Generally it’s referring to consolidating debts into a home mortgage but it can be done with just a personal loan.
The idea is to reduce interest charged and either reduce the monthly payments or use the savings to clear the debt faster.
The consolidation calculator gives a great example of how this can work for you and really benefit you financially.
Two main factors to consider
Term of Loan
Extending the term (converting a 5 year personal loan into a 20 year mortgage) with a debt consolidation mortgage will cost you more over time even though the interest rate is lower and the monthly payment is greatly reduced.
Secondly - setup costs
Often much of the interest rate saving is eaten up by the higher setup fees on a mortgage.
Interest Rate is obviously important too but generally the term has a greater impact on the monthly payment.
What Brokers don’t tell you when consolidating
Many mortgage advisors gloss over the true cost of consolidated loans and focus your attention on the monthly payment of a debt consolidation mortgage.
Wouldn’t you prefer a single loan payment of £600/month at 6.5% rather than paying £1,125 with a 16% interest rate on your credit card. Sounds great doesn’t it
Now add it up (assuming the rates stays constant). £600/mth is £7,200 per year over 23 years totals £165,600
Assuming a mortgage of £60,000 and consolidated debts of £25,830. By continuing with your current payments your unsecured debts would be cleared in 3yrs 3 mths (even at 16% interest) then all you would owe is your mortgage. Total cost over next 23 years - £135,758. A saving of £29,843 rather than using a debt consolidation loan.
So why consolidate debts?
One simple answer….Lower Monthly Payments!!
We all know that paying more clears debts quicker. The problem is often peoples monthly payments are too high and lifestyle suffers and can put your home at risk.
Best of both worlds…
Lower monthly payments & Pay Off Debt Faster!!!
Answer… Consolidate Debts to lower payment but Overpay or shorten term to reduce the debt quicker. The key is to determine an affordable level of repayment.
Example again..
Current payments £1,125/mth is too much
Consolidated Mortgage Payment £600 over 23years cost too much over term.
Answer…£780 per month (or similar. Set the figure yourself using a spending plan) this would make you DEBT FREE in 14 years. Total Cost - £130,942
Use both the
debt consolidation loan calculator
and the
term/goal calculator
along with your spending plan to find the best mix that suits your goals.
to make the most from your
Debt Consolidation Loan
read through the examples again and work through your own situation.
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