Debt consolidation and impulse purchase

Debt consolidation as a solution to financial problems caused by impulse purchase

Unpaid debts can often place financial and emotional stress on the debtor. Initially people take loans to improve lifestyle quality, however the burden of repayments of new debt can make their life more difficult.

For example, consumers on an average income will often purchase an expensive car requiring 1/3 of their income in repayments on the loan. When taking into account fuel cost, maintenance and insurance the consumer will realise the real cost of the new loan. Of course, there are other payments such as rent, electricity, phone bills, groceries, medical cost, etc. All these payments were easily manageable before the purchase of the car, but now there is a financial strain.

Soon after demand letters for late payments follow. At this point consumers realise that there is simply not enough money to service all their debts.

Impulse purchase is responsible for many debt related problems. Impulse purchase can also include holiday cost, buying a new boat, cosmetic surgery, etc.

In this scenarios debt consolidation can reduce overall interest rates and repayments on all existing loans, creating savings and a financial relief. This is a simple solution for a financial difficulties created by the lack of proper budgeting.

Secured loans such as car, equipment and machinery are easier to consolidate as there is security for the lender. This type of loans will generally have lower interest rates comparing to unsecured loans.

Debt consolidation of unsecured loans will require slightly higher interest rates and the maximum amount to consolidate is lower comparing to secured loan consolidation.

Consolidation of secured or unsecured loans will almost always produce savings. If the interest rate cannot be reduced, the loan repayment term can be extended, resulting in reduced monthly repayments.

Following example outlines how this works. A consumer with $40,000 debt with the interest rate of 16% and loan term of 5 years will be required to pay $973 in loan repayments each month. The same loan amount with the same interest rate over the 7 years period (instead 5 year) will pay only $794 in loan repayments per month. The end result is $183 saved per month.

If the interest rate can be reduced to 13% the consumer would be paying $728 in loan repayments per month. In this case the end result is $245 saved per month.

A single loan provides a convenient way to manage your finances while saving you money.

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