29 May 2006

Free yourself from debt

Are your debts controlling you and winning lotto seems to be the only solution? Still trying to get over Christmas or the impulsive holiday on your credit card? And let’s not forget the car loan, personal loan or hire purchase.

Whenever you are confronted with financial difficulty the first thing you should always do is a budget.  Work out exactly how much you are earning, where you are spending your money and determine if there is any means by which you are able to reduce this expenditure. It is important to establish why you are in financial trouble in the first place.

If you are unable to take control of your finances, for some people the best solution is to consolidate all your debts into one loan.

Your first goal in consolidating your debts should be to reduce our overall borrowing costs by obtaining a lower average rate of interest and creating one simple monthly repayment.

In reality though, consolidating debts isn’t always easy and it can often turn out to be just another step into deeper debt. You have to be mindful that whilst consolidating your debts may reduce your monthly repayment, if the repayments are over a longer period, the total of all your repayments may be increasing the cost of borrowing, even though you have benefited from a lower interest rate.

Ideally you should endeavour to maintain your monthly repayments at the same level, which when coupled with a lower interest rate, will allow you to repay your loan over a shorter period and save on borrowing costs.

The easiest way to consolidate all of your debts is to refinance your home loan as it normally has a very cost effective rate of interest, significantly lower than credit and store cards, personal loans and hire purchase agreements.

Chances are that if you have owned your home over the last few years the increase in capital value will have generated sufficient equity to re-finance your home and repay all your other loans. When re-financing it is best to maintain the balance of your loan term and increase your repayments to ensure that you take advantage of the reduced rate of interest.

Remember your spending habits will need to change to avoid getting in to debt problems again.

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