Debt Consolidation in Australia
If you’re carrying multiple types of debt at once, you might have had a debt consolidation loan recommended to you at some point. But what does that actually mean, and how do these debt loans work? What is the easiest debt consolidation loan to get? Whether you have good credit or bad credit, debt consolidation loans can be a great financial tool to help strengthen your finances.
What is debt consolidation?
A debt consolidation loan is a loan that combines multiple other lines of credit into one big loan with a single interest rate. Those lines of credit might include other personal loans, vehicle loans, credit cards, or even medical bills. The goal is to help you reduce your monthly payments and pay off debt faster.
Consider an example where two high-interest loans become one low-interest loan. If you owe $10,000 on a car and have 8% interest, and you owe $2,000 on a credit card and have 12% interest, you could get a debt consolidation loan. Your new lender would pay off those two prior loans in full. Then you would owe the new lender $12,000 at just 5% interest. Your new loan might also have lower fees and more favourable conditions.
How do debt consolidation home loans work?
A debt consolidation home loan operates on the principle that your biggest outstanding loan is likely to be your mortgage, and that it would be easiest to wrap your larger loans into your mortgage payment. Under a debt consolidation home loan, your other outstanding debts get folded into your home loan.
How do you compare debt consolidation loans?
Just like with any personal loan, a debt consolidation loan has many different features and attributes that can vary quite a bit. Make sure you know which components to consider when trying to choose the right loan for your situation.
This determines how much money you’ll pay back on top of the principal loan amount. Interest can be fixed, meaning the rate stays set for a certain period. It can also be variable, meaning the rate fluctuates with the market.
While the interest rate is crucial, it doesn’t always tell the full story. Loan fees can easily make a low-interest loan much more expensive. Always check the comparison rate to get the true, bottom-line cost of the loan with all fees included.
Secured vs unsecured
A secured loan has collateral that the lender can take from you in the event of nonpayment, while an unsecured loan has no collateral. Secured loans are lower-risk and thus often come with lower interest, so keep that in mind.
The duration of the loan typically ranges from one to five years for a personal loan, though it’s not uncommon to see seven years or longer. Be cognizant of the change between your current loan term and a prospective new loan term.
Extra Features of Debt Loans
Beyond the main components of a loan listed above, every loan comes with special add-ons and conditions that can have a major impact. Make sure you read the fine print for any new loan offer you commit to.
Extra repayments You can get the loan paid off faster by making additional repayments, but not all lenders might allow this. Some might charge fees for this.
Redraw facility If you’ve made extra repayments and now need quick funds, you could “re-borrow” the money if your lenders allow it. Watch out for fees.
Flexible schedule To make budget planning easier, look for flexible repayment schedules that match your paycheque, whether it’s weekly, fortnightly or monthly.
Additional fees Beyond the fees already discussed, there may be application fees, establishment fees, account upkeep fees, late fees, and exit fees.
Do debt loans hurt your credit?
Any new loan or credit product has the potential to impact your credit score. With a debt consolidation loan, you’ll likely have a credit file check (sadly there aren’t many bad credit debt consolidation loans with guaranteed approval). The hard credit check might ding your score. Furthermore, closing out several accounts at once can sharply reduce the average age of your loans, which also affects your credit.
However, if your new loan is a substantially better deal than the sum of your old loans, the long-term benefits outweigh the short-term drawbacks. If the debt consolidation empowers you to make consistent repayments and reduce your debt overall, then it will boost your credit score as well.
Can you get a debt consolidation loan with bad credit?
You can absolutely get a debt consolidation loan with bad credit, but you’re likely to get offered higher interest rates. As a result, the debt loan may not end up being any cheaper than your existing lines of credit. Fortunately, other options are available:
- Specialised unsecured personal loans: You could effectively DIY a debt loan by taking out an unsecured personal loan and using it to pay off several other loans. If you check out multiple offers, you’re more likely to find a competitive interest rate.
- Part 9 debt agreement: This is essentially a partial bankruptcy declaration and establishes that you are unable to pay certain large debts. However, this should be a last-resort option since it stays on your credit file for five years and greatly hurts your credit score.
Bad credit debt consolidation tips
Here are some additional recommendations for debt consolidation loans:
- If you improve your credit even a little bit, you can increase your chances of getting a low-interest-rate debt consolidation loan offer. A slightly higher credit score can make a huge difference.
- Look into getting a risk-based personal loan, where the loan is customised based on your particular financial history. You may be able to find a sweet spot and get a decent interest rate despite having mediocre credit.
- Research loan eligibility requirements before applying. Each rejected application can reduce your credit score, which hurts your chances for the next application, and so on. Don’t apply for near-certain rejections.
- To keep a close eye on several outstanding lines of credit, consider using a personal finance app. These services can help you construct and maintain a budget by centralising your different financial accounts in one easy place.
Alternatives to debt consolidation in Australia
If learning more about debt consolidation has shown you that it’s not a good fit for your finances, don’t despair. There are many other financial tools available to help you get on top of your debt.
Try out balance transfer credit cards: These are a special type of card that lets you consolidate multiple credit cards into one. They usually have a low introductory interest rate to help stabilise your debt, but once that period is over, they have high interest rates.
Consider debt consolidation for home loans: If you have an existing home loan that you’ve been making steady payments on, some lenders may enable you to refinance your other loans to combine them into your mortgage. However, spreading out your loans over a longer time period can lead to more money paid back overall. You also risk tying up your mortgage with debts that you can’t afford.
Refinance: Rather than completely cutting off your old lender, see if you can refinance. There may be new loan products available that have more competitive interest rates or lower fees. Be sure to watch out for any early exit fees on the prior loan, as well as application fees on the replacement loan.
Talk to your credit provider: Lenders are often willing to collaborate with you so that they can keep you as a customer. See what you can negotiate in terms of interest rates, fees, and extra features. They may offer hardship assistance support in the form of financial counselling, a temporary payment pause, or other debt restructuring.
Debt consolidation FAQ
With debt consolidation, you still owe all of your existing debts, but they have now been combined into a single loan under a new lender (or under one of your existing lenders, like with a debt consolidation home loan).
With a debt agreement, you are declaring that you are unable to pay your debts in full, and you contribute partial amounts of money towards a debt agreement fund. Your lenders then receive dividend payments from those contributions. You are only eligible for a debt agreement if you cannot afford your debts.
Main advice for debt consolidation loans in Australia
Paying off debt is a challenge for many Australians, and having too many loans can often feel overwhelming and leave you unsure of where to turn. A debt consolidation loan is a great financial tool to reorganise your debts and make them easier to manage. Educating yourself on debt consolidation helps ensure that you implement it the right way and in a manner that fits your needs.