DEBT CONSOLIDATION SCENARIO

Meet Reginald:

Reginald has accumulated various debts over the years:

- $5,000 on a credit card at 18% interest rate.

- $4,000 on a credit card at 22% interest rate

- $9,000 in personal loans with interest rates varying from 5% to 25%.

- $15,000 in HECS loans

He has also just had a letter from the ATO saying they will pursue legal action to recover their arrears of $7,000 if not paid in 60 days.

Current Situation:

Reginald finds it challenging to manage multiple payments each month, and the high-interest rates are making it difficult for him to make significant progress in paying off his debts. He s also very concerned about the ATO as he’s heard they are getting more aggressive pursuing arrears.

Decision to Consolidate:

Reginald decides to explore debt consolidation to streamline his payments and potentially lower his interest rates.

Steps Taken with the assistance of his broker:

1.     Initial Fact Find:

Reginald supplies some basic information to his broker to enable him to research the best option. Reginald supplies his driver’s license, summary of income and expenses, assets and liabilities.

2.     Research and Comparison:

His broker researches different lenders offering debt consolidation loans or programs.

He compares interest rates, fees, repayment terms, and eligibility requirements to find the best option.

3.     Recommendation:

Reginalds broker presents to him three possible lenders who may be able to help him. He details interest rates, terms and conditions, term and monthly repayments etc. Reginald choses one of the lenders recommended by his broker.

4.   Application and Approval:

Reginalds broker sends him a list of documentation required to apply for the loan. The type of documentation may vary by lender and applicants’ financial status. 

The broker applies for a debt consolidation loan or program with the lender recommended by the broker and chosen by Reginald.

5.   Loan Approval:

Reginald’s application is approved, and he receives a debt consolidation loan of $40,000 at a lower interest rate of 10%.

6. Paying Off Existing Debts:

The lender directly pays off Reginald’s existing debts with the $40,000 loan proceeds.

Reginald’s credit card, personal loans, and HECS debt are now consolidated into a single debt with the lender.

7. New Repayment Plan:

Reginald now has one monthly payment to the lender, simplifying his financial management.

The new loan has a fixed interest rate and a structured repayment plan, which helps Reginald budget more effectively.

BENEFITS:

Simplified Payments:

Reginald only needs to manage one monthly payment instead of multiple payments.

Potentially Lower Interest Rate:

Depending on the terms of the consolidation loan, Reginald may have reduced his overall interest burden.

ATO Issue gone:

The ATO is now off his back so he can sleep better at night.

Improved Credit Score:

With fewer debts and a more manageable payment plan, Reginald may see an improvement in his credit score over time if he makes regular payments.

CONSIDERATIONS:

Total Cost:

Although the interest rate may be lower, extending the repayment period could mean paying more interest over time.

Credit Score Impact:

Closing old accounts and opening a new loan may temporarily impact Reginald’s credit score.

Financial Discipline:

Consolidating debt only makes sense if Reginald commits to not accumulating new debts and adhering to the new payment plan.

In summary, debt consolidation can be a viable strategy for simplifying finances and potentially reducing costs, but it requires careful consideration of the terms and long-term financial discipline to be effective. If you have any questions, please give us a call or make an appointment for us to talk using this link https://calendly.com/tony-stellarmortgageadvisors