High interest debt, such as credit cards or personal loans, can quickly spiral out of control, draining your financial resources and completely derailing your property investment goals.
Using your savings to get out of a hole is tempting, but it may not be the best or most cost-effective way of solving the problem.
In this blog, we’ll cover a few clear, actionable strategies for paying off debt without dipping into savings, particularly for property investors.
Why High-Interest Debt Is a Financial Trap
One of the advantages of high-interest debt like credit cards or personal loans is that they’re easy to access. When that unexpected cost comes along, a new oven or an urgent repair for example, you turn to the easiest available credit and use that to cover the costs.
But if those debts build up they bring a lot of issues with them:
- High interest rates mean that your debt costs a lot of money.
- The higher your debt, the higher the risk for other lenders if you need to borrow in future.
- The more reliant you are on short-term debt, the lower your credit score.
- The higher the risk for lenders and the lower your credit score, the more interest you pay on future loans.
Those factors combined make the debt hard to pay off, while compounding interest can see you actually gathering more debt over time. For example, a $10,000 credit card debt at 20% interest costs over $2,000 annually in interest alone if unpaid. That takes its toll on you and your family mentally and financially.
Prioritising High-Interest Debt for Repayment
To get that high-interest monkey off your back, focus on high-interest debt as your first priority. Even if there are other debts that have been on your back for longer, if your more recent $5,000 debt costs 20% in interest then you’re still better off using the money to pay it down.
To get started, use the ‘avalanche method’. Start by paying off the debts with the highest interest rates while maintaining minimum payments on the others to reduce your overall costs.
In other words, start with the debts that are draining the most resources, most likely credit cards or payday loans.
What Is Debt Consolidation, and How Does It Work?
Debt consolidation combines multiple debts, like credit cards or loans, into a single loan with one monthly payment, often at a lower interest rate. This simplifies repayments and can save money on interest.
This reduces the threat of compound interest, reduces the stress of dealing with multiple payment deadlines, and streamlines your finances.
To understand the potential saving, use an online debt consolidation calculator. But remember, there’s more than one way to consolidate your debt, so which is right for you?
Alternatives to Using Savings to Pay Off Debt
There are multiple options out there for consolidating or paying off your debt without having to use your savings. For instance:
- Balance Transfer Credit Cards: Transfer your existing credit card debt to a new card with 0% interest for a limited period. Must usually be paid off before the promotional period ends.
- Personal Loans: Lower interest rates than credit cards, suitable for structured repayments.
- Equity Release or Rental Income: Leveraging assets for liquidity without dipping into personal savings. Equity release increases your loan-to-value ratio and may cost you more in interest, while advanced rental income like that provided by Futurerent means no extra debt and no watering down your equity.
Simplifying Debt Repayments
One of the main advantages of consolidating your debts through a loan, equity release, or rental prepayment with Futurerent, is that you only have one account to think about rather than multiple loans. Even better, if we’re talking about using Futurerent, we’re not talking about borrowing money or having to worry about repayments given your property manager will simply send a portion of the rental income paid by your tenant to Futurerent each month..
The Cost of Debt Consolidation Without Interest
One big plus when it comes to an advance payment on your rent with Futurerent is that, unlike loans, there’s no interest. That means your repayment amounts can’t change without warning when rates go up.
For example, let’s say you have a property worth $600,000 in Sydney with an outstanding balance of $200,000 on your mortgage and a monthly rent of $2,400. You want to cover debts of $60,000 and so:
- You decide against a personal loan and get an upfront advance of $60,000 within a few days to pay off your high-interest debt.
- Over 3 years, you pay a total of $14,040, deducted from the rent paid by your tenants.
- Even though interest rates with the banks go up, the cost of Futurerent is fixed at $390 per month based on the expected term (and if it takes Futurerent slightly longer to get the fixed amount of rent it is entitled to, it won’t cost you any more).
Once more for the folks in the back: the cost is fixed. Fixed costs eliminate surprises, making budgeting easier and reducing financial anxiety. This is why, when you’re trying to pay off your high-interest debt, you have to fully understand the potential costs in advance.
When Debt Consolidation Is the Right Choice
Of course, first of all you need to know whether or not debt consolidation is right for you. To make that call, ask these questions:
- What is your total debt load and what are the interest rates? If you have high levels of debt at high interest, you’re a prime candidate.
- What is your monthly repayment capacity? Whatever option you choose, you need to make sure you can afford the payments.
- What are the different consolidation options available, and will they really lower your costs? Don’t consolidate for simplicity alone. This should be a chance to reduce your monthly outgoings.
- How can you avoid accumulating new debt after consolidation? Don’t replace one high-cost debt for another.
A debt consolidation loan may not give you the answers you need on all these questions. That’s when it’s time to consider alternatives. If you own a property portfolio, an advance payment on your rent could be the way forward.
Avoiding Common Pitfalls in Debt Management
Next, it’s vital to remember that consolidating your debt is the start of the solution, not the end. If you get things wrong in the follow up, you’ll only end up in more trouble down the line.
How can you stay on the right track? Avoid these common pitfalls:
- Taking on additional high-interest loans post-consolidation.
- Neglecting to adjust spending habits, leading to new debt accumulation.
- Ignoring fees associated with consolidation options (e.g., application fees).
The common factor is to make absolutely sure that you know what you’re getting into. Don’t get caught out with fees and payments that you didn’t plan for. This is why a simpler option like Futurerent can often be more sustainable. You know exactly what you’re getting, so you can plan accordingly.
What’s the Cost of Accessing Your Rent in Advance to Consolidate Debt?
The cost of using Futurerent is fixed each year on the rent advanced, charged in monthly equal instalments.
As a quick guide, if you get $50,000 of your rent in advance to consolidate your debt and choose to pay it back over 2 years, you’d pay:
- a total of $7,800 over 2 years, which is equal to
- $3,900 per year, or
- $325 instalments per month, paid from your rental income
- depending on whether you use one of Futurerent’s property management partners (in which case it may be free to setup) or bring your own property manager - up to $4,648 in costs to setup
Lose the Debt, Keep Control
High-interest debt is a killer for your property investment goals. If you try to get out of it in the wrong way, you end up replacing one unsustainable, high-interest solution for another.
But done right you can consolidate your debt, prioritise loans with the highest interest, and use your assets in a smart way without just diluting your equity.
Ready to take control of your debt? Check out our online calculator to help you crunch the numbers.
FAQ
1. Can I consolidate debt without refinancing my property?
Yes, through personal loans, balance transfers, or rental income.
2. What happens if I miss a payment on a consolidated debt?
Traditional loans may charge late fees; Futurerent instalments pause if tenants default or vacate the property.
3. What are the benefits of Futurerent for debt consolidation?
No interest, fixed costs, no hidden fees, quick approval, flexible repayments.
4. Can I consolidate multiple debts with Futurerent?
Yes, absolutely! You can access up to $100,000 in rent with Futurerent.
5. How does the tax work with Futurerent
As we explain in more detail in our FAQs, we have obtained a product ruling from the ATO to make things easy for your accountant. At the end of each financial year we will provide you with a statement showing the rent collected by Futurerent and your indicative accrued rent (see paragraphs 15(b) and 15(c) of the product ruling). The statement is intended to assist you in filling out your tax return and does not constitute tax advice. Futurerent does not provide taxation advice. You should review the product ruling for more information and seek your own tax advice on the application of the product ruling to your own specific circumstances.
