Winning the Debt War
The Australian Bureau of Statistics estimates that the average amount of money Australian households owe on mortgages, credit cards and personal loans combined is approximately $168,600 per household. In 2015-16 it was reported that the most common form was credit card debt held by 55% of households.
Some debt, such as money borrowed to invest, is considered more productive than borrowing to buy stuff or pay bills. If your debt is not productive and is weighing you down, there are some solutions for winning this battle. Here are three...
Solution #1 – Know Thy Needs
Do you know how much you actually owe compared to how much you actually earn? The first step in getting your debt in control is to do a budget. You don’t need a fancy app; sit down with a piece of paper, pen and a calculator and do the simple sums. Once you know exactly what you need to cover your debts put aside that money from every pay to reduce your loans. (Alternatively there are some great budgeting apps available – use your favourite search engine to find one to suit – but make sure you don’t get distracted!).
Solution #2 - Consolidate To Your Home Loan
If you have multiple loans look at consolidating them into one loan, which may be an existing loan or a new one. The goal of debt consolidation is to reduce the amount of interest paid overall, so it’s important to choose a loan that has a lower rate of interest. Usually the lowest interest rate is paid on your home loan, followed by secured loans and unsecured loans.
If you have equity in your home, you may be able to increase the loan and pay off your other debts. Once those debts are cleared you will have more money to make extra payments to the home loan and own your home sooner (and reduce the interest amount).
This is how it could work for you:
Darren and Sue owe $18,000 on credit card debt and a car loan. Their home is worth $600,000 which has a $400,000 mortgage at an interest rate of 4.00% pa. The combined repayment on all three loans is currently $2,300 per month. Their bank has approved an increase on their loan of $18,000, which they use to clear their debts. Their outstanding home loan is now $418,000 and the new monthly repayment is $1,995, but they continue repaying $2,300 each month. By doing this, they can cut over seven years off their home loan and save thousands on interest.
Be aware: when you consolidate using a home loan, you effectively turn short-term loans into longer-term borrowing and this can be more expensive unless you repay more than the minimum required.
Solution #3 – Consolidate To A ‘Honeymoon Offer’ Credit Card
Credit cards have high interest rates however banks often have special deals to attract new customers by offering no- or low-interest rate periods on balance transfers. After working out your budget (solution #1) and being sure that you can repay the entire balance during the honeymoon period, transferring multiple credit card debts into one credit card with a minimal interest rate could be an excellent option. But the only way this will work is to cut up all of your other credit cards!
These are just a few ways to win the debt war. If you need help in taking control of your debt and enjoying the sense of freedom that follows, please contact us.