Up to your neck in debt? Consolidation might be for you

Monday, May 20, 2019

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AT some stage of your adult life, you will likely find yourself engaged in borrowing or debt financing while on your pursuit of self-actualisation and personal satisfaction.

The purpose of borrowing may be to assist with tuition financing to boost your career aspirations; mortgage financing to realise your dream of owning a home; or just simply swiping that credit card when you need it the most. Creating a balanced debt portfolio is important, especially when managed and controlled effectively.

Unfortunately, not everyone will find themselves with debts that are manageable, and this often times leads to an untenable situation where the borrower finds it difficult to honour these commitments with the possibility of default.

Debt consolidation might be the fix

If you find yourself in a situation where you have debts “up to your neck”, then a debt consolidation might be the ideal solution for you.

Debt consolidation is the amalgamation of two or more debts into single monthly payment with an affordable payment plan.

Let us look at a few debt consolidation options that should put you back on track.

1. Repay high interest rate debts first by consolidating

Before you seek to consolidate your debt, it is best to arrange your loan portfolio based on the interest rates from high to low.

In this case, credit cards would be your top priority, followed by any hire purchase agreement and then, finally, all other personal loans.

Repaying loans with the highest interest rate first should increase your savings due to a lower monthly payment achieved through a longer tenure.

To illustrate this tenet, let us use Jane, a civil servant who earns a monthly net income of $100,000.

Based on Jane's minimum monthly obligation of $55,000, she could consider a debt consolidation loan of $1,000,000 (no collateral required), with an interest rate of 16.75 per cent for five years. This would realise a new monthly payment of approximately $25,000, with savings of $30,000 monthly. Jane could now possibly begin to either offset household expenses, reduce existing loan balances, save towards purchasing a car/house, or even invest in an interest-bearing investment account.

2. Utilising the equity in your property by consolidating

You have worked hard to own your home, now is the time to make your home work for you. With a home equity loan you're able to use your property as collateral to secure a loan from your financial institution, based on the available equity in your property.

Let's assume that Jane, in our previous example, was able to use the savings attained and acquire a property four years after doing the debt consolidation plan.

Equity = Property Value - Outstanding Mortgage (if any)

Invariably, home equity loan options are very useful as the tenure usually ranges between 10-15 years, with interest rates typically in the single digits. Note also, with the recent property and transfer tax adjustments presented in the 2019/20 budget presentation, one can expect very favourable terms for these type of facilities.

Utilising this debt option to consolidate personal and other debts can result in lower monthly payments.

Truth be told, managing and taking stock of your debt can be a hassle. However, with self-discipline, practical budgeting techniques along with receiving sound financial advice from a team of experts, debt management can be more meaningful as you chart your course towards financial well-being.


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