Understanding Debt Management

Understanding Debt Management

Debt management strategies Debt or borrowed money can play an important role in helping you achieve your lifestyle goals and objectives. However, it is important it be managed and structured effectively to minimize borrowing costs. The way debt is managed may depend on whether it is considered ‘efficient’ or ‘inefficient’.
June 30, 2015
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Fixed rate loan

Fixed rate loans protect you against the risk of an interest rate rise by fixing the interest rate applicable to all or a portion of, your loan for a set period of time. If interest rates rise, you will have the security of knowing the interest rate on the fixed portion of your loan and your regular repayments will not change until the end of the fixed period.

Be aware

  • Fixed rate loans are often higher than variable rate loans.
  • If variable interest rates fall during the term of your fixed interest rate loan, you won’t benefit from this.
  • Fixed rate loans generally have limited features and restrictions are applied on additional repayments which may prevent you from accelerating the repayment of your loan.
  • Early payout fees usually apply to fixed rate loans.

Variable rate loan

Variable rate loans have an interest rate that may change. Therefore, minimum repayments may vary with changing interest rates. Often, variable rate loans have a lower interest rate than fixed rate loans. Variable rate loans also have greater features than fixed rate loans, such as the ability to make additional repayments, vary payment frequency, redraw facility, offset facility and portability.

Be aware

  • If interest rates rise, your variable rate loan and repayments are also likely to rise.
  • If you are not using all the features of your variable rate loan, you may be paying a higher interest rate than needed.

Consolidating your debt/ Debt Management

A simple strategy to lower your overall interest rate and more easily manage your debt is to consolidate all debts into one loan that provides a lower interest rate and features to help you repay your inefficient debt faster.

Debt recycling

In some cases, it may be appropriate to consider replacing inefficient debt with more efficient debt that can be used to create wealth tax effectively. This strategy is known as debt recycling but should only be undertaken after a thorough analysis of your financial situation. Debt recycling can be an effective strategy to accumulate wealth over the long-term. It is a process of using surplus capital or cash flow to reduce inefficient debt and then replacing it with efficient debt in the form of an investment loan. The investment loan proceeds are then invested to form part of your investment portfolio. The inefficient debt is eventually extinguished and an investment loan with fully tax deductible interest remains. There is no tax benefit available on debt used for personal purposes, but a tax deduction is available on the interest expense on investment loans where the loan is used to purchase income producing assets. Debt recycling therefore results in a more tax efficient outcome and wealth accumulation benefits through the accumulation of an investment portfolio. Note the investment loan would need to be repaid at some point in time.

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Peninsula Business Solutions (PBS) Ltd was established in the UK in 2004 and licensed by the UK OFT (Office of Fair Trading) to provide Consumer Credit Services. We are regulated by the OFT and follow the strict guidelines provided by the UK FSA (Financial Services Authority). In 2007 PBS established a branch in the UAE which provided us international presence and the ability to expand and diversify our services along with our International network and affiliations. We specialise in providing high end professional consultancy on Company Registration in Dubai, company setup services across the UAE and Debt Recovery Services