Debt Consolidation and Reduction

"The most powerful force in the universe is compound interest."

- Albert Einstein

3 steps forward, 2 and a half steps back. That's how most people struggling with credit cards and personal loans feel - you just never get anywhere and all your income goes straight to the bank.

One of our major goals here at Compass is to help people take control of their finances. For a lot of people this is easier said than done. One fact remains the same though - interest is only good for the bank. If you can reduce the amount of interest you pay, then you should be able to make larger repayments off the actual loan. The more the loan reduces, the lower the interest and so on.

Debt Consolidation If you have numerous debts and some equity in your property, you may want to consider increasing your home loan to pay off the other debts. The home loan interest rate is usually the lowest, meaning your credit card interest rate would drop from around 18% down to the home loan rate which would be less than 8%.
Before Consolidating
Debt	Amount	Interest Rate	Monthly Repayment
Home Loan	$235,000	7.2%	$1,691
Car Loan	$15,000	13.5%	$ 345
Credit Card 1	$6,000	18%	$ 180
Credit Card 2	$4,500	19%	$ 135
Total	$260,000		$2,351

After Consolidating
Debt	Amount	Interest Rate	Monthly Repayment
Home Loan	$260,000	7.2%	$1,871
By consolidating their debt, this family has been able to reduce their monthly repayment by $480. Such a savings could mean the difference between being able to pay their bills and defaulting. It might also mean that they can go on a family holiday for the first time in years. But perhaps most importantly, it should mean that they are able to reduce their debt more quickly. Before consolidating their debt, this family had 25 years remaining on their home loan. If they continue paying the original $2,351 into the home loan each month instead of the minimum $1,871, then they will be able to pay off the loan much more quickly. Infact, if they stuck to these payments then they could be debt free in 15 years which could save them over $100,000 in interest payments to the bank. WARNING: There are dangers involved in doing this. First of all, once the credit cards are paid off, they should be closed down and cut up. If the debt is racked up on them again then they are in a worse position than when they started. Secondly, if they only make the minimum repayment on the new consolidated loan, then the 5 year car loan could turn into a 25 year car loan. Even though the interest rate is lower, the fact that it is being paid off very slowly means the compound interest is phenomenal and that $25,000 car could end up costing more than double that. For this reason, we always suggest our clients run a monthly budget or at least account for all of their expenses each month. We've seen a lot of budgets and have developed a system of accounting for your expenses that is fast and painless.

Debt Consolidation

Before Consolidating

After Consolidating