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Is Debt Consolidation Worthwhile?

A lot of us have heard the words Debt Consolidation, but are confused about what they exactly mean. It can also be tricky to understand how a Debt Consolidation Loan might help you.

In today’s world, many of us are struggling to pay high interest rates on our debts. This applies particularly to credit cards, store cards, car leases and various other kinds of personal loans. It just takes one unexpected event in life, like an illness or an accident for debts to start spiraling out of control. That can easily put extreme financial pressure on an individual and their family. If this happens to you, wouldn’t it be great to have a sensible plan put in place to protect your financial interest?

Debt Consolidation Facts

So what is a Debt Consolidation Loan then? To put it simply, it’s a special type of loan that allows you to convert or consolidate all your existing loans into one single loan. This is secured against your home in the form of a new mortgage. Home loan rates typically have lower interest rates than all other finance, so this is a way to reduce overall monthly debt stress.

It involves combining all your debts and loans, whether you are up-to-date with payments on them or not, into one loan. This loan should have a lower overall periodical repayment.

A common circumstance is if a person falls sick and cannot work for example. They may then leave their not so critical loans like credit cards go into default, while just paying their mortgage. Then the debt and monthly repayments to clear it begin to mount. This can then lead to mortgage defaults as minimum payments on other debts must be paid to avoid debt collection proceedings.

Just defaulting for one or two months is bad enough, but if you let these defaults run up to 3 or 4 months or above, it can become nearly impossible to catch up. Once you are in this situation, your credit rating will be affected and most traditional lenders will most likely refuse to loan you money in the form of a personal loan.

Debt Consolidation Case Study

Let us take a real life example which could happen to anyone:

David was a fully employed office worker in his mid-thirties on a salary package which comfortably supported his day to day expenses. This included the expenses of his family such as monthly mortgage payments on their home, car loans and minimum payments on his credit cards. Unexpectedly, he developed a gall bladder problem. This caused him to lose control of his bowels. Because of the nature of his condition, he was forced to take six months off work for treatment, after which time he was fully recovered.

During this six month period with no income coming in, the family was forced to pay for their daily living expenses with credit cards. David was not in a position to pay his loans and defaulted on his mortgage and car loans too.

His loans looked like the following :

Mortgage : $202,000 at $1550 pcm (per calendar month)

Credit Card Debt : $22,000 at $660 pcm. This was also in default with a debt agreement to pay $10,000 to close account.

Car Loan 1 : $13,000 at $390 pcm (3 months behind)

Car Loan 2 : $29,000 at $900 pcm (3 months behind)

The critical things to consider in this situation were:

  • The bank was ready to foreclose on his home and both car loans
  • The credit card company was willing to take 10k to close the account.
  • His home value was $330,000 (equity)
  • His total loans were $254,000
  • His current monthly repayments were $3500

Upon his recovery, David assessed his situation and realised that it was impossible for him to try and pay off all his defaulted loan repayments and credit cards. This was compounded by some high interest rates and penalties associated with each of his loans. After being refused personal loans from a number of possible lenders and being faced with the possibility of losing his family home, David was advised by a close friend to approach a debt consolidation specialist.

That is when we met David. Having looked at his loan particulars and financial records, our debt consolidation experts worked out the following deal for him :

  1. Refinance all Davids loans into one facility.
  2. The loan amount required to clear all debts and set up the new home loan was $250,000
  3. His monthly repayment on this loan was $2438 per month

By doing this, David reduced his outgoings by nearly $1000 per month. Best of all now however, was that all the lenders were off his back. He is now able to put the past in the past and move forward.

Debt consolidation loans are saving various families like David’s from losing everything they have worked hard for. If you are in a similar situation, then contact us to find out how a Debt Consolidation Loan could help you.

We have further information on the best reasons to consolidate debts, and the best times to apply for a debt consolidation loan here.

Contact Us for information on consolidating debts today at 1300 796 850 today.