How you can reduce interest expenses
With so many opportunities to borrow money these days, is it any wonder many of us fall under the spell of “have it now, pay for it later”, especially when the interest deals are so attractive?
Sadly, some people get carried away and soon find themselves with so many loans and rising interest. A great way to manage this predicament is “debt consolidation”.
This practice combines existing debts into one easy-to-manage loan with just one regular repayment. In doing so, you have the opportunity to reduce your regular monthly payment amount (either through a lower interest rate or longer loan term), or to reduce your loan term and save on interest expenses. Consider the following example.
Joanne currently has the following debts that she is struggling to pay.
| Before consolidation | |||||
| Credit Type | Interest Rate | Initial loan amount | Loan Term | Balance Outstanding | Regular monthly repayment |
| Home Loan | 5.0% | $300,000 | 14 years | $210,000 | $1,753 |
| Personal Loan | 12.0% | $20,000 | 5 years | $18,000 | $445 |
| Credit Card# | 20% | $10,000 | – | $8,500 | $255 |
| Store Card# | 28% | $3,000 | – | $2,300 | $115 |
| $238,800 | $2,568 | ||||
# Assumes minimum payment of 3% on credit card with a term of 21 years and 10 months, and a minimum payment of 5% on the store card with a term of 9 years and 7 months.
| After consolidation into home loan – reduced interest rate and increased term## | |||||
| Credit Type | Interest Rate | Initial loan amount | Loan Term | Balance Outstanding | Regular monthly repayment |
| Personal Loan | 5.0% | $28,800 | 5 years | $28,800 | $544 |
| Personal Loan | 5.0% | $28,800 | 7 years | $28,800 | $407 |
| After consolidation into home loan – retain current payments## | |||||
| Credit Type | Interest Rate | Initial loan amount | Loan Term | Balance Outstanding | Regular monthly repayment |
| Personal Loan | 5.0% | $28,800 | 3 years & 3 months | $28,800 | $815 |
## Assumes money is borrowed against equity in home to pay out existing high interest loans.
By consolidating her debts into her home loan using a sub-account facility at a lower interest rate, Joanne is able to reduce her repayments by $271 per month on a five-year loan, or $408 per month on a seven-year loan. Alternatively, should she choose to continue her current repayments, she will be free of her non-mortgage debt in just three years and three months.
Whichever option suits your circumstances, debt consolidation might help you to better manage your money and your time. Always consult a licensed adviser to guide you.
Sources:
www.canstar.com.au/interest-rate-comparison
www.infochoice.com.au
www.brighterfinance.com.au
Disclaimer: The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Synchron Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Mirador Wealth Management, Synchron, nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information. Authorised Representatives of Synchron AFS Licence No. 243313
