A New Year is a nice fresh start but often leaves many with credit card hang-overs and regrets for not having had the foresight to be more money smart.
In late January/February clients usually start calling for help & advice on debt consolidation.
Credit card and personal loan consolidation into your home loan can certainly take the sting off monthly repayments, but careful! You can find yourself actually paying more interest in the long term, if you're not money smart about how you do it.
Let's use a credit card which is maxed out at $10,000 as an example, so we can compare some numbers:
The maxed out card would cost you approximately $175 per month in interest alone (at a 21% credit card interest rate) let alone trying to pay back the $10,000!
If consolidated into a home loan at say 6.3%, your monthly interest cost plummets to $52.50!
If you simply lump it in with your home loan & make principal & interest payments, it adds $62 per month to your costs
Great!!! Let's do it, you say! But not so fast...
It's all very well to save on interest & lighten the burden on your pocket, but how much will it actually cost you in the long run?
Do you realize that if you do the latter & simply pay $62 per month, it will cost you over $12,000 in interest alone over a standard 30 year home loan term? Plus the $10,000 principal!
However all is not lost! It's just a matter of being a bit money smart. Have a look:
You can consolidate into your home loan & save on interest charges, but choose to pay the $175 it would have cost you in credit card interest towards it. That means the $10,000 is erased in just under 6 years and cuts your interest charges down to about $1,900 You've just saved $10,000!! The credit card company wouldn't just let you pay the interest either. Monthly minimum payments would've been approx $250. If you choose to pay that amount towards the consolidated debt, you've paid it out in under 4 years and saved $11,000 in interest!
Some helpful hints:
Consider consolidating debts, but only as a means to help you pay them off faster
When consolidating, keep up the same repayments as you were making before
Never just 'consolidate and let it sit' • Get Money Smart & learn how to plan ahead!
Incidentally, we see this all the time and people sometimes complain how long it will take to pay back a 'measly' $10,000 credit card debt when they already have a home loan to worry about.