If you are carrying various forms of debt and making multiple, sometimes high-interest payments each month, debt consolidation could be the best way to manage your money, your time and your debt.
Here’s how and why it works:
• Eliminates high-interest, high-cost loans — by consolidating car payments, education loans, lines of credit and expensive credit card payments into one, lower-interest loan.
• Lowers your monthly interest payments — by consolidating your debts, you can seek out a lower overall interest rate than the combined rate you’re currently paying on all your debts. When you’ve consolidated all your loans, you then have two choices:
- 1. Keep your “pre-consolidation” payment amount – because you’re paying a lower interest rate on your consolidated loan, by applying the same payment amount towards your debt you will be putting extra money towards the principal debt repayment and will eliminate your debt much faster.
- 2. Keep your amortization or debt payback period the same — your new lower-interest consolidated loan means a reduced payment amount and the creation of additional cash flow that you can use to reach other financial life goals.
Here are a few other debt management suggestions:
• Consider consolidating through a home equity loan — you’ll pay a much lower interest rate than on many other types of loans and especially your credit cards that can range from 19 to 28 per cent interest on outstanding balances.
• Keep amortization to a reasonable timeframe — aim for repayment within five years.
• A line of credit is not for everyone — although it provides added flexibility for your borrowing needs, if you have trouble sticking to a budget and typically have little money left at the end of the month to apply to your debt, a personal loan or a refinanced mortgage might be better options because they require a defined principal repayment plan instead of allowing for interest-only payments.
• Keep one credit card for emergencies — and cut up all the rest until you have control of your debt.
• Be cautious about debt counselling companies — be sure the company is reputable and is focused on your best financial interests.
It’s a good idea to speak with a professional adviser about creating a debt management plan that works for you. And once you’ve done that, take steps to create a longer-term financial plan. After all, with your debt under control and better cash flow, you can really start saving toward all your life goals.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.