The benefits of debt consolidation for your clients

Could your clients benefit from consolidating all their debts into their home loan? Debt consolidation has become a very effective way to reduce the amount of interest being paid on car loans, personal finance and credit cards by combining all these debts into the home loan at the home loan’s lower interest rate. Could your clients benefit from consolidating their debts into their mortgage?

With home loan interest rates significantly lower than the interest rates of other forms of credit in Australia, debt consolidation has become a very effective strategy for some people in reducing the total amount of interest that they pay on all their various forms of credit. And not only does debt consolidation reduce the amount of interest payable, it can also simplify your clients’ finances as well. This is because they only have the one loan to repay, rather than several loans. It allows them to take care of all their repayments with the one regular home loan repayment.

Here’s how debt consolidation works
Your client combines their existing personal loans, car loans, credit card debt and any other loans they have into their mortgage. With the interest rate on the mortgage generally at a much lower rate than for other types of credit, the client is paying the same low home loan interest rate on all their loans and credit. And when you consider some credit card interest rates can be over 17 per cent, this can produce a big saving on the amount of interest they have to repay.

There can be a trap
It’s important to be aware though, that your clients can fall into a trap if they seek the benefits of debt consolidation. If they simply transfer their other debt into the mortgage, and then continue to repay the same amount off the mortgage as they were before, they may be saving now by reducing their total monthly repayments, but they could end up paying much more interest in the long run. This is because they will be paying interest off their other debts for the life of their home loan instead of the original term of the loan, which is generally any where from three to five years. This could mean that the total amount of interest they repay actually increases quite substantially over the life of the home loan simply because they are dramatically increasing the term.

How it can benefit your clients
For debt consolidation to really be effective, your client should continue to pay the full amount of what their monthly repayments were on their total loans prior to consolidating, and then continue paying that same amount off their new mortgage amount. This way, they will pay off their other debts much more quickly and they will really benefit from the effects of consolidating their debts into their lower interest rate home loan.