Debt Consolidation Loans Australia

How to decide if debt consolidation is a good option for you. 

Debt consolidation loans can help you to better manage loan repayments. Here are some reasons for opting for a debt consolidation loan.

• If you’re struggling with multiple payment due dates: If you have to juggle multiple due dates across car loans, credit cards and even buy now pay later purchases, you’re far more likely to let one slip and wind up with a missed repayment on your record. A debt consolidation loan rolls all of these into one loan, which means you’ll only have one repayment and one due date to keep track of.

• If you have multiple debts with high interest rates: Generally, a credit card will charge interest at a much higher rate than a debt consolidation loan, so it’s usually more expensive to have a large credit card balance than to have that balance on a debt consolidation loan.

• If you don’t know which debt to prioritise first: It can be stressful trying to deal with multiple debts at once. Do you pay down your credit card first? Or your personal loan? Or do you try to tackle both at once? A debt consolidation loan can help simplify things.

• If the benefits of consolidating outweigh the downsides: When you choose a debt consolidation loan, it will likely have a longer loan term (think 3-5 years). By stretching debt out over this length of time, you could potentially wind up paying more interest than you would if you could pay off the original debts in a shorter time frame. So make sure you do the math, and be sure switching to a debt consolidation loan is actually worth it.

Can a debt consolidation loan hurt your credit score?

Like any other kind of lending, a debt consolidation loan could hurt your credit score if you aren’t responsible with meeting your repayments. However, if you’re responsible, it doesn’t have to affect your credit negatively.

If you apply for a debt consolidation loan, it will appear on your credit history as an inquiry and, if you’re successful, as a new source of credit available to you. This can be good or bad - it lowers your credit utilisation, which is usually a good thing, but it also raises the amount of total credit available to you, which isn’t always as positive.

Paying off lingering debts (and closing old credit accounts if you no longer use them) is a good thing and will usually a positive move not only for your credit history but for your finances in general.

How do debt consolidation loans work?

As the name suggests, a debt consolidation loan works by rolling debts from multiple sources, for instance car loan and credit card, into a single personal loan.

Apart from the benefit of saying goodbye to multiple payments as you'll only have one monthly repayment, you'll also get the chance to reduce the interest rates you're paying, particularly if you're consolidating high rate credit or store cards into the new loan.

Scenario: Say you have the following debt:

• $20,000 car loan with a 9% interest rate
• $5,000 credit card balance with a 22% interest rate
• $2,000 on your store card with an 18% interest rate

In this scenario, your monthly repayments would be $899 and over 3 years, you'd pay $5,373 in interest. Whereas if you rolled that $27,000 worth of debt into one single loan with an 8% interest rate, your monthly repayments would go down to $846, and you would pay just $3,459 in interest over 3 years - that's a total saving of $1,914 in interest.

Steps to consolidating debt

1. Step 1: Work out how much you will need to borrow to pay off your combined debts.
2. Step 2: Compare personal loans from banks and online lenders.
3. Step 3: Apply for the debt consolidation loan.
4. Step 4: Use the new funds to pay out the balance remaining on loans, credit cards and other debts. Close these accounts.
5. Step 5: Stick to the new repayment schedule for the consolidation loan until the balance is paid in full.   

Debt consolidation loan comparison must-dos:

While one low rate debt consolidation loan could definitely help you kick your debt to the curb, it's important to know how to use the product to your advantage whilst avoiding the traps that could see your debt stick around for longer than you'd like.

Here are the absolute must DOs

There are plenty of choices when choosing a debt consolidation loan, but the wrong choice could end up costing you big time. So make sure you take the time to consider your different options when it comes to finding the right loan for you. Start by deciding whether you will sign up with a secured or unsecured loan:

• Secured loan: As the name suggests, this personal loan option requires you to put up an asset, such as a car or house, as security for the loan. In return, the lender will often reward you with a lower interest rate and fees. But keep in mind, if you're unable to keep on top of your loan repayments, the lender has the right to repossess your assets as restitution for any loss they incur.

• Unsecured loan: Many debt consolidation loans in Australia are unsecured, meaning no security is needed, which is perfect if you're a borrower who doesn't have any assets or is unwilling to put your car or home at risk. But you'll generally pay a higher interest rate and fees compared to a secured loan.

2. DO compare interest rates 

You'll also have the option of choosing between a fixed and variable personal loan interest rates. Here's the difference between the two:

• Fixed interest rate: With your rate locked in for the life of the loan, you will be able to make a clear budget, as you will know what your ongoing repayments will be. Keep in mind that some fixed rate loans may not come with the flexibility of making extra repayments or if you want to pay out the loan early you might have to pay a break fee.

• Variable interest rate: An alternative option is a variable rate loan that usually comes with flexible features and a generally lower interest rate and fees, but be mindful the rate could change at any time depending on the market or the lender.

2. DO look for flexible debt-busting loan features

You're making the smart move of rolling your debt over to a consolidation loan, but you could make an even smarter move by choosing a loan with features that will help you pay off your debt sooner. 'How' you ask? With these two flexible options:

Extra repayments: Okay your finances may not be looking their best now. But you never know when you'll land that work promotion or end of year bonus. So if you find yourself with extra money in your pocket down the track, you'll want to make sure the debt consolidation loan you sign up with gives you the ability to pump it straight into paying off your loan.

Flexible repayment frequency: Did you know that if you choose to repay your loan on a fortnightly schedule rather than monthly, you'll pay off an extra month at the end of the year? It's true. Let's give you a scenario. Say you repay $500 a month - over one year, you'll have paid off $6,000 of your loan. Whereas, if you choose the 26-fortnight option, you will pay off $6,500 - bringing you that much closer to blasting your debt for good.

3. DO set up automatic loan repayments

And last but definitely not least, make sure you never miss a fortnightly or monthly loan repayment by setting up a direct deposit from your bank account to your debt consolidation loan lender.

What are the DON'Ts for consolidating debt?

1. Don't roll your debt into your home loan

Home loan interest rates are competitive right now, with many sitting under the 3% mark. However, be mindful that merging your different debt into your home loan could mean you'll pay more in interest in the long run because home loans have a far longer time frame.

Using the example of a $300,000 home loan with a 5% interest rate, by rolling $20,000 into your mortgage, you will end up paying $15,075 in interest on that debt over 25 years. Whereas, if you merge that debt into a consolidation loan over 3 years with a 10% interest rate, you will only pay $3,232 in interest. Rolling debt into your home loan will only make financial sense if you keep repayments high so that you crush the debt in the shortest time possible.

2. Don't forget to check for hidden debt consolidation fees

The interest rate isn't the only thing you should consider when comparing debt consolidation loans. You should also make sure you can afford any fees, including:

• Application fees: The provider may charge you an upfront fee to cover administration fees and to run a credit check to see the level of risk they are taking on by approving you for the debt consolidation loan.

• Ongoing fees: You could also be charged a small monthly fee of around $10 but before you think that's less than a tuna sandwich these days, over 5 years, that $10 will add up to $600 - think about how many lunches that could buy you.

• Break cost fees: The Australian Government kicked variable rate exit fees to the curb back in 2011, but if you sign up with a fixed-rate consolidation loan, you could still feel the bite of a break cost fee if you decide to pay the loan early. So this is something to watch out for when you begin your debt consolidation loan comparison if you think you might be able to pay off your loan early.

3. Don't keep on using your credit cards

Once you've found the right debt consolidation loan for you, it's time to close your old credit card accounts. Not only will this stop you from accruing more debt but if there were annual fees on the card you will no longer have to pay these.

How to get help if you're struggling to pay off debts

Covid:19 has resulted in a lot of financial difficulty for many Australians. If you’re struggling with paying off your debts and managing repayments, there are resources available to help you. From debt advisors to online help, here are a few places you can turn for help with debt.

• Your credit provider. First things first, get in touch with your credit card provider or lender early on. They can offer hardship assistance, like putting you on a payment plan or maybe even changing the conditions of your repayments to make them easier to keep up with. When you contact your provider, ask to speak to the hardship department. You’ll likely need to explain why you’re having trouble making repayments and how long the trouble will last, but you can request that they change your loan repayments (if they refuse, you can refer them to section 72 of the National Consumer Credit Code)

• National debt helpline: The National Debt Helpline is a not-for-profit organisation that offers free, independent financial counselling to help you get back on track. If you’re already struggling with your budget, this free service could be an invaluable resource for professional help on fixing your debt problems.

• Community Legal Centres: If your debt has already gotten to the point where your lender is threatening legal action - or you think they might soon - you might require legal help. Your local Community Legal Centre is a free resource to help you navigate the legal side of dealing with debt.

• Lifeline: Aside from your finances, debt can take a toll on other parts of your life, including your mental health. You can reach out to Lifeline over the phone or online if you need help making it through this tough time in your life.

Debt is no fun, but you shouldn’t be embarrassed to seek help. Taking steps to fix the problem is much more admirable than sticking your head in the sand!