Q. I’m a single mother with 2 young kids. I have three credit cards with debts of approximately $2,000 on each. In addition, I need to service my mortgage repayments. A lender offered to consolidate my credit cards under one debt using the car as a security. What’s the risk of doing it this way? What other options do have?
A. I am surprised that a lender has suggested you consolidate your credit card debt using your car as security. My experience lenders usually lend on vehicles either at the time of purchase or in a refinance situation when they will only lend dollar for dollar, ie the existing amount outstanding by way of a lease or personal loan. They generally don’t allow for any increase in the debt mainly because cars depreciate in value and the lender’s security therefore diminishes over time.
You could possibly approach your existing home loan lender and see whether they may be able to consolidate the $6,000 into your home loan. This should improve your cash flow position because not only will the interest rate be less than the credit card rates but also the monthly amount will be further reduced because you’re spreading your repayments on $6,000 over a 20 year term. the monthly instalment on $6,000 is around $50 per month. What you need to remember, however, is that by doing this you ultimately pay more in interest (the total amount paid over a 20 year term would be $12,000 approximately), but nevertheless your cash flow problems will definitely ease. In addition you’re generally able to make additional repayments of principal at any time without penalty, so if you can budget more than $50 then you will repay the $6,000 more quickly.
Your lender’s response to the request will depend on your existing repayment history with them, your current salary and the value of your home. if your mortgage only represents, say, 65–75% of your home’s value, you haven’t defaulted and you have a steady paying job, then chances are the lender will be happy to assist. That said, don’t over commit yourself because if you cannot budget for the, say, $50 per month increased mortgage repayments and default on the home loan, you risk losing it.
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