3 ways to use debt consolidation to incorporate debts elsewhere

Personal debt can creep up on us slowly, gathering in size until it becomes a black cloud hanging over our head. Many New Zealanders are paying interest on their credit card balance. Add to that the various types of personal loans that are available and it isn’t too difficult to find ourselves juggling several loans at once.

If that sounds familiar to you then debt consolidation might be a means to minimise the impact that this debt has on your cashflow. “Debt consolidation” means refinancing your debt onto the lowest interest rate possible – and setting up a realistic repayment plan to get it paid off! There are three main ways that you can do this:

1. Consolidate your Credit Card Debts into a Personal Loan

A significant benefit of consolidating your credit cards onto a personal loan is that a personal loan has a defined lifespan. That is, your repayments are calculated in order for you to be able to pay the loan off over a certain time frame.

Example:

Type Amount Owing % Rate Monthly Repayment Details
Credit Card $10,000 17.0% $203 Interest = $32,625 over 40 years and 2 months.
5-year personal loan $10,000 10.0% $215 Interest = $2,748 over 5 years.

So in this example, incorporating your credit card into a personal loan (and paying an extra nineteen dollars per month) will help you to pay your credit card off within five years and potentially save you a significant amount of interest. Compare personal loans on our database.

2. Offering Balance Transfer Rates – and pay it off 

Another option is to transfer your balance to another, cheaper card and to set up an automatic repayment plan that will clear the debt within a short space of time. An important proviso to be aware of with this strategy is that after the advertised number of months at the low interest rate, all unpaid balances are transferred to the standard interest rate. As such, it may be necessary to utilize several balance transfers in succession in order to extinguish your debt. This can have implications for your credit history.

Example:

Type Amount Owing % Rate Monthly Repayment Details
Credit Card $10,000 17.0% $203 Interest = $32,625 over 40 years and 2 months.
Low balance transfer card $10,000 1.0% for 12 months $210 Interest = $199 over 4 years.

3. Incorporate the Debts onto your Mortgage

Provided you have both a mortgage and the available equity against your home, incorporating your personal debt onto your mortgage and increasing your repayments proportionally can save you a significant amount of interest. If you can tick all those boxes though, then incorporating your debt can be both cost effective and easy on your budget, depending on the situation.

Example:

Type Amount Owing % Rate Monthly Repayment Details
Credit Card $10,000 17.0% $203 Interest = $32,625 over 40 years and 2 months.
25-year Mortgage $300,000 6.4% $2,017 Interest = $305,075 over 25 years
Total Repayment $2,220 Interst = $337,700

Proposed:

Type Amount Owing % Rate Monthly Repayment Details
25-year Mortgage $310,000 6.4% $2,220 Interest = $274,845 over 21 years, 7 months.

So, in this example, incorporating your $10,000 credit card debt onto your mortgage and keeping your overall repayment level the same not only means that you will extinguish your credit card debt (and eliminate the attendant interest), but that you can also pay your home loan off more than three years earlier and save around $62,800 in interest costs. That’s a win/win situation! Try our mortgage repayment calculator and check out our home loan database to compare offers.

Of course, any debt consolidation strategies can only be successful if you cancel your credit cards and avoid running up further debt. If you can commit to that, though, debt consolidation can potentially save you a lot of money.

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