Do you have a number of loans with differing terms and interest rate charges? If you do, it might pay to consolidate them all into one loan (usually your mortgage because it usually has the cheapest interest)
Here’s an example* based on an Australian Unity client.
Let’s say they have three loans as shown in Table 1:
|Table 1:||Amount||Interest & Term||Monthly|
|Car Loan||$35,000||13% for 5 yrs||$797|
|Mortgage||$300,000||5.8% for 30 yrs||$1,761|
Our typical advice to help this person would be to:
- Find a home loan with a lower interest rate
- Borrow the entire $360,000 as a home loan (using equity in their home to borrow against for the extra $60,000)
- Pay off the car loan & credit card.
Their monthly repayments will then be $1,022 a month less, as shown in Table 2.
|Table 2:||Amount||Interest & Term Repayment||Monthly|
|Home Loan||$360,000||4.9% for 30 years||$1,911|
A trap many people fall into is to allow the $1,022 saving per month to become spending money. As a result, the $60,000 they have borrowed for the car loan and credit card will now be paid off over 30 years and they will pay interest on that of $54,637.The solution is to maintain the repayments of $2,933 a month they had originally. This strategy ensures they quickly pay off the part of the new loan that relates to the car and credit cards,and it also gets them ahead on the rest of the new loan. If they maintain the extra repayments of $2,933 per month, they will pay off the $360,000 home loan in just 14.2 years… and save $187,207 in interest repayments, when compared to paying off the loan at the required $1,911 per month, as shown in Chart 1.
*Example does not take into account any fees associated with changing loans or ongoing costs other than interest and repayments.