Debt consolidation loans can save you money, but not always.
Sometimes people do a debt consolidation loan and it actually costs them more as they are charged fees and end up taking longer to pay off the debt; therefore end up paying more interest to the lender.
We know how easy it is to borrow money for cars, boats, the big screen television, some jewelry or a holiday.
While individually the repayments for these loans may seem quite reasonable, when you look at them they can be very expensive loans and this can stop you from doing other more important things like buying a first home.
Recently I managed to get an approval for a debt consolidation loan that will literally change this couples life.
They Wanted To Buy Their First Home
Like many young couples they have traveled a bit and recently got married so now its time to buy their first home.
But also like many young couples, they have good incomes and been in the habit of getting finance to pay for things so they had racked up quite a bit of debt.
The repayments on the loans totaled about $540 per week which was okay for this couple, until they wanted to buy their first home.
The bank looked at their incomes and then assessed what they could afford after paying these debt repayments of $540 per week and it worked out that according to the bank criteria they could not afford the mortgage for the home that they wanted.
After the bank said NO they were recommended to get in touch with a mortgage broker and they contacted me.
Too Much Debt Can Be A Problem
Before I approach a bank for finance I will assess any loan applications by applying the bank criteria to the applications to see if they will be approved or declined.
In this case we established that there were two reasons that the banks would decline this mortgage application;
Too many short-term debts – they had seven short-term debts which included four credit cards and three personal loans. Banks do not like applicants with multiple loans as this shows a bad habit of getting short-term debt and therefore have concerns that this habit may continue and the borrowers could face financial pressure and ultimately default on their loans.
Too high repayments – after a person receives their income, the loan repayments for short-term debt are deducted before the bank or other lender assesses the ability to meet the mortgage repayments. With credit cards and store cards most banks will assess the repayments as being 3% of the limit regardless of the actual loan balances. With this application the repayments were $540 per week and even with the couple having a joint income of $185,000 per year it did not allow enough surplus income to cover the mortgage that they needed.
We had to reduce the number of debts and also the repayments.
This is where having a mortgage broker with a range of debt consolidation loans to choose from is helpful.
Debt Consolidation Loans Can Help
As mentioned debt consolidation loans can help.
Our couple had seven short-term debts which included four credit cards (ASB Visa, Kiwibank Mastercard, GEM Visa and Q-Card) plus three personal loans (two with ASB Bank and one with Kiwibank) which added up to $51,301 and were costing our couple $540 per week.
Interest rates charged on many short-term debts are very high and this couple were being charged high rates on these debts;
- ASB Visa 20.95%
- Kiwibank Platinum Mastercard 20.95%
- GEM Visa 25.99%
- Q-Card 25.99%
- ASB Personal Loans 17.95%
- Kiwibank Personal Loan 14.99%
After assessing the options we arranged a debt consolidation loan of $50,000 with a lower interest rate of 11.90% and with a 5-year loan term this saw their repayments to just under $260 per week which is about half what they were paying.
More importantly this freed up $280 per week which could then be used to pay the mortgage repayments, and this was the difference that aloud this couple to buy their first home.
How Much Will A Debt Consolidation Loan Save You?
Everyone’s need for a debt consolidation loan will differ, and because of that we cannot say how much you will save with a debt consolidation loan.
As mortgage advisers we have access to a number of lenders that offer these types of loans and we always seek to get the loan that best fits the specific situation.
For this couple the most important factor was to reduce the repayments so they could also qualify for a mortgage, but in many cases the focus will be to get the debt paid off as soon as possible. If they were focused on paying this off, they could continue to pay the same $540 per week and would have the loan paid off in about 2-years instead of 5-years.
Check out the debt calculator on the Sorted website and see what paying extra could do to your loans.
Better still, contact me to see if one of the many debt consolidation loans is the right choice for you.