Why debt consolidation could help win business in 2023
Are you looking for ways to attract and retain customers but feel hampered by rising interest rates? The cashflow savings of debt consolidation may be your answer in 2023.
Australia’s rising interest rates show no sign of easing soon, according to Monash University Economics Lecturer Isaac Gross. This poses challenges if your customers think a lower rate is the only way to improve cashflow.
However, there are many more opportunities. Borrowers are increasingly seeking solutions to financial strain as rising rates take more money from the household budget. This is where debt consolidation can help.
Let’s look at the facts. Australians rushed to take personal loans from 2020 to mid-2022 as interest rates plunged following the coronavirus outbreak. This surge in borrowing is plain to see in the Australian Bureau of Statistics’ graph of new loan commitments.
As we now know, interest rates did not stay low. A string of rate hikes from mid-2022 meant many borrowers had to allocate increasing amounts of money to mortgage repayments. A tool like debt consolidation can give them back the cashflow they used to have.
Customer saves more than $1,000 a month using debt consolidation
Let’s take the example of Roger and Ria Smith*.
They would love to take their children overseas to meet family now that COVID restrictions have lifted around the world, but their rising loan repayments means they have limited spare cash.
Their liabilities include:
A $30,000 personal loan for home extensions - $250 per month
A $10,000 credit card debt - $120 per month
A $40,000 car loan - $1,500 per month
An $800,000 mortgage- $4,314 per month
Total - $6,184 per month
Naturally, the Smiths’ first inclination is to try and reduce their largest monthly outgoing, their mortgage, by asking for a lower interest rate. However, their broker explains their Resimac variable interest rate of 5.04% pa is already extremely competitive given their financial situation.
But he can still help to improve the Smiths’ cashflow by consolidating their debts.
This means extending the loan amount on the Smiths’ mortgage to $880,000 to immediately pay out the providers of the personal loan, credit card debt and car loan.
The personal loan, credit card debt and car loan carried interest charges of 12% pa or more.
The Smiths can repay the remainder of these loans as part of their mortgage and at the Resimac rate of 5.04% pa.
There is more great news for the Smiths. Their total monthly repayment, all being paid at the lower mortgage interest rate, is lowered to $4,845.57.
This means the Smiths have $1,338.43 more to spend each month. This will help them save for their trip sooner.
While the consolidated debt will take longer to pay, the Smiths prefer the improved cashflow and chance to take their children overseas while they are young.
Consolidating their debts has also allowed them to own their car outright. They have cleared the other debts and are dealing with one finance company rather than four.
The debt consolidation opportunity for brokers
Which of your customers might benefit from debt consolidation? The answer is anyone who has debt other than their mortgage. This debt might not be just other types of loans. School fees and tax debt are two sorts of liabilities that can be paid out by extending the loan amount in a mortgage.
Resimac will also pay up to $500,000 of business debt moved to a home loan.
You can also create loan portions in consolidated debt to ensure customers repay amounts at the schedule of the original loan. This can ensure, for example, that a customer repays their car loan over the same five-year term but at the lower Resimac interest rate. This could save them money instead of repaying the car loan over the longer home loan repayment schedule.
Portions could also be useful to demonstrate expenses at tax time. A customer may have loans for business equipment they use to earn their income. Singling this loan out as a portion can better show the interest paid. This interest can be deducted from the customer’s earnings at tax time.
Debt consolidation is available with Resimac Prime and Specialist products.
Speak to your BDM or relationship manager to find out more.
* All names and details are fictitious and are for illustrative purposes only.
Disclaimer: Any advice and information relating to this article is general only, and has been prepared without taking into account your client’s particular circumstances and needs. Before acting on any advice in this article you should assess or seek independent advice on whether it is appropriate for your client’s needs, financial situation and investment objectives.