Debt consolidation loans Australia

How do debt consolidation loans work?

As the name suggests, a debt consolidation loan works by collecting your debts from multiple sources. The goal is to streamline your debt repayments so that they’re easier to manage.

Here’s a typical scenario with three different debts:

1. $20,000 car loan with a 9% p.a. interest rate (over 3 years)

*Total interest paid: $2,896 

2. $5,000 credit card balance with a 22% p.a. interest rate ($200 paid per month) 

*Total interest paid (over 2 years and 10 months): $1,750

3. $2,000 on your store card with an 18% p.a. interest rate

*Total interest paid (over 1 year): $360 

All up, the debt here amounts to $27,000 borrowed plus $5,006 of interest: $32,006 in total.

However, if you rolled the $27,000 worth of debt into one single loan with an 8% p.a. interest rate, your monthly repayments would go down to $846. This would see you pay just $3,459 in interest over 3 years instead.

So with the help of a debt consolidation loan, you’d be looking at $27,000 + $3459, for a total of $30,459.

That’s $1,547 less than in the first scenario.

With the potential cost benefits explained, let’s briefly consider the process.

Steps to consolidating debt with a personal loan

1. Work out how much you need to borrow to pay off your combined debts.

2. Compare personal loans from banks and online lenders.

3. Apply for the debt consolidation loan.

4. Use the new funds to pay out the balance remaining on loans, credit cards and other debts. Close those accounts.

5. Stick to the new repayment schedule for the consolidation loan until the balance is paid in full. 

How do I apply for a debt consolidation loan?

Each Australian banking provider has its own criteria for consolidation loan qualification, so the success of your application will depend on the amount of debt you’re in and your credit history. 

Here’s a quick checklist of what your provider will likely need:

• Personal identification

• Employment status/stability

• Verification of income and expenses

• Additional info about debts and liabilities

• Credit history report.

And, here’s how you can improve your chances of approval:

• Pay as many of your existing debts off as you can.

• Only request to borrow as much as you need. 

• Check your credit report, make sure it’s accurate. 

• Minimise your credit card balance.

• Know your budget and ability to meet repayments.

The length of time it takes to organise and consolidate the debt into a single repayment will depend on the lender you’re dealing with. Some personal loan providers will help you with this process, others will leave it up to you. 

Keep in mind that if your debt consolidation loan application gets rejected, it doesn’t mean you can’t apply again, it’s just best if you wait a little while before you do.  

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

Debt consolidation loans can help, but how do you know they’re right for you? 

Let’s go over some instances where this type of personal loan might be suitable for you:

• If you’re struggling with multiple payment due dates: When juggling multiple debts 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. 
• 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.
• 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 tackle both at once? A debt consolidation loan can help simplify things.
• If the benefits of consolidating outweigh the negatives: By stretching debt out over a few years with a loan, you could wind up paying more interest than if you paid off the original debts in a shorter time frame. So do the maths first, and be sure switching to a debt consolidation loan is actually worth it.

Pros and cons of a debt consolidation loan

How to compare debt consolidation loans

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 it.

Below are the main features to compare.

Think about secured vs unsecured

Secured loans: require 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 repayments, the lender has the right to repossess your assets.

Unsecured loans: do not require the security of an asset as collateral, which is ideal if you're a borrower who doesn't have any assets or is unwilling to take on that risk. But you'll generally pay a higher interest rate and fees compared to a secured loan.

Compare interest rates: fixed vs variable

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’ll have a clearer view of your budget. But 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: 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. This means your budget might need adjusting.

Look for flexible loan features

You also need to choose a loan with useful repayment options. 

For example:

Extra repayments: If you find yourself with extra money in your pocket, you'll want to make sure the loan you select lets you put some into paying off your debts.

Flexible repayment frequency: This can certainly help. Repay your loan on a fortnightly schedule rather than monthly and you can pay off your loan faster.

Automatic repayments: 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.

Weigh up interest rates

The interest rate depends on a number of factors including whether you’re taking out a secured or unsecured loan. A secured loan will usually have a lower rate because you’re putting up an asset as security.

These days, many providers also offer Australian borrowers personalised interest rates depending on their credit history. Usually, the better your credit score, the lower the interest rate will be. This is why many lenders have 'from' rates advertised, which indicates a range of options

Final word: debt consolidation loan checklist

Finding the best debt consolidation loan for your needs is going to depend on a few important steps.

• Compare several loans before deciding

• Make sure you’re happy with the interest rate

• Check for hidden fees such as application, ongoing or break costs

• Know your credit history. Eliminate your credit cards or other products contributing to debt.