Consolidation loans

By Polly Fleeting ·
young-couple-consolidating-debt-with-loan

Put your hand up if you’ve ever wished that all your debts would just disappear? You’re not alone.

At Mozo, we’re not saying that debt is always a bad thing. Not at all.

In fact, borrowing and credit can be a great long term plan that helps you purchase big ticket items like a house or a car that you wouldn’t be able to without the aid of a loan. Especially if you manage your repayments well. 

But there is a downfall. If you’re not careful, take on multiple forms of credit and start overspending, bad debt can creep in. And you could leave yourself drowning in a number of interest repayments. 

However, there is a solution.

If you are juggling a bunch of different debts, whether thats mixture of a personal loan, car loan, credit card or store card, you may want to introduce yourself to a debt consolidation loan. 

Start searching now below!

Compare debt consolidation loans - page last updated September 19, 2020

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  • 8.00% p.a.

    8.21% p.a.based on $30,000
    over 5 years

    Terms from 1 to 7 years. Representative example: a 5 year $30,000 loan at 8.00% would cost $36,647.51 including fees.

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  • Hot DealZERO Upfront fee until 30th September 2020^

    6.95% p.a.to 19.99% p.a.

    6.95% p.a.to 19.99% p.a.based on $30,000
    over 5 years

    Terms from 1 to 5 years. Representative example: a 5 year $30,000 loan at 6.95% would cost $35,599.71 including fees.

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  • 6.99% p.a.to 25.69% p.a.

    7.79% p.a.to 26.65% p.a.based on $30,000
    over 5 years

    Terms from 1 to 5 years. Representative example: a 5 year $30,000 loan at 6.99% would cost $36,208.67 including fees.

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  • 6.99% p.a.to 9.49% p.a.

    6.99% p.a.to 12.2% p.a.based on $10,000
    over 3 years

    Terms from 2 to 3 years. Representative example: a 3 year $10,000 loan at 6.99% would cost $11,114.11 including fees.

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    6.49% p.a.to 8.79% p.a.

    7.84% p.a.to 9.36% p.a.based on $30,000
    over 5 years

    Terms from 3 to 5 years. Representative example: a 5 year $30,000 loan at 6.49% would cost $35,459.64 including fees.

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What is a consolidation loan anyway?

A debt consolidation loan, is a loan which combines your high interest rate loans and even credit cards repayments into one loan at a lower repayment. That means you have one bill to pay each month instead of many.

Ultimately, it takes the headache away of having to balance multiple accounts and making sure you have enough for every bill. Plus, you only have to remember one due date!

But what will repayments look like? 

Well, the good thing about debt consolidation loan repayments is that it’s one amount that you pay each month. Because the interest usually remains fixed for the life of the consolidated loan, you can have peace of mind knowing your bill will be the same each time around. 

It's important to note, avoid rolling your debt into your home loan, as these loans have a longer timeframe and you could end up paying more in interest.

How does a debt consolidation loan work?

Think of it as a type of debt relief. You’re still paying off what you owe, but at a reduced rate.

Although you may have debt from a number of financial institutions, you can take out a debt consolidation loan from one lender (who will roll all your debts in one).

And there a plenty of options too. To workout what type of debt consolidation loan you're after, you'll have to ask yourself: 

Secured or unsecured? Fixed rate or Variable rate? 

Here's a breakdown of what that means: 

Secured loanThis means you'll have to put up an asset as collateral against the loan, such as a car or your home. These loans often come with lower rates and fees as you are considered less risky. Just remember, lenders have the right to repossess your assets if you default on the loan.
Unsecured loanOften debt consolidation loans are unsecured loans. This means you don't need to put up any collateral. An unsecured loan is ideal for someone without assets or who doesn't want to put their belongings at risk. However, these loans are often subject to higher rates and fees.
Fixed interest rateLocking in a rate for the life of your loan can be a great way to ensure your repayment stays the same. This can make it easier for you to budget and ultimately say goodbye to debt! Just bear in mind, fixed rate loans may not offer flexible options like extra repayments.
Variable interest rate This option often comes with a lower rate, less fees and flexible features. However, with a variable rate you run the risk of it fluctuating with the market. On one hand if it drops, it's good news, but if it spikes your repayments will become more costly. 

Remember when applying for a debt consolidation loan that every financial institution is different. As mentioned above, some require you to own property before qualifying for this type of loan as a safety net for them while others do not. You can compare debt consolidation loans on Mozo here.

How much could I save with a debt consolidation loan? 

While it's true that a debt consolidation loan can take away the hassle of managing multiple debts, it could also save you money! 

If you are consolidating a high interest credit card, store card or even personal loan, chances are with a debt consolidation loan you'll receive a lower interest rate. 

Here's a scenario:

This is your debt: 

  • $25,000 car loan at 8.00% interest rate 
  • $4,000 credit card balance at 17.50% interest rate 
  • $3,000 on store card at 20.00% interest rate

Currently, you'd be paying a combined monthly repayment of $1,078 if your debts remained seperate. Over three years that would end up costing you $5,892 in interest. 

However, if you opted to roll your debt ($32,000) into a debt consolidation loan with an 8.00% interest rate, your repayment would be $1,003. This would mean over three years you'd pay $4,099 in interest - that's a saving of $1,793!

Who offers debt consolidation loans?

Banks You may be surprised to learn that even your very own bank may offer this type of service. Although it may be tempting to stick with your familiar bank, it could be worth shopping around for a better deal. After all, now that you’re a loyal customer, your bank no longer has to work hard to win your business.

Credit unions Other reputable financial institutions are worth enquiring with, including credit unions. You may find that credit unions have more time to sit with you and find a better solution for you. They do have a reputation of working for their members and not for the big bosses.

Peer to peer lenders Want to bypass the banks and get funds direct from an investor? A peer to peer (P2P) platform might be a good option. P2P lenders in Australia often have lower rates and fees than banks. P2P lenders usually have lower borrowing limits than banks and loan terms are generally under 5 years. For more information about, read our peer to peer lending guide.

However, if you come across a financial institution whose name is a little unfamiliar, makes unrealistic promises and offers incredibly low rates to begin with and extraordinarily high rates in the long term, then you may want to steer clear of them. You don’t want to get into the red again after steadily repaying your loans.

What if my bank doesn’t have a consolidating loan option?

There are some institutions that call it just that: a debt consolidation loan. For those that don’t have a name for it, you can apply for a personal loan or even a balance transfer for your credit card from one institution to another to help you minimise your repayments.

Personal loan A personal loan can be available to purchase anything from a car, wedding to a holiday. But in this circumstance, you’d want to be pretty strict with the purpose of your loan.  Personal loan rates are often lower than credit card rates, making interest repayments more affordable.

So if you want to pay a few debts off at once, a personal loan can be a great idea, providing of course you dedicate that loan to consolidating existing debt only. Not for extravagant spending.

Credit card balance transfer This option is definitely worth considering if some or all of your debt is centred around credit card debt. Some financial institutions offer great deals like 0% balance transfer or a fairly low percentage repayments for a number months.

But be weary, after the honeymoon period of the balance transfer offer, the rate may jump to a super high percentage. This could be either the card's purchase rate or cash advance rate. Be sure to take advantage of the time period you’ve got to repay your debt within the honeymoon period, and work out what your minimum repayment will be to get it down to zero dollars asap.

How do I work out my loan repayment?

You may have worked out by now that financial institutions may be a little sneaky when it comes to asking for a minimum repayment, especially with credit cards. If we repaid our credit card debts at the minimum amount every month then we’d find ourselves with the same debt for a very long time and probably paying interest only!

Minimum repayments may seem extremely affordable, which is great if you’re strapped for cash for a short period of time, but you want to pay above and beyond you minimum to actually pay off your debt quickly. Avoid remaining locked in to a contract that doesn't allow you to repay more, flexibility is key! Check out Mozo’s personal loan repayments calculator to see how much your repayments will be.

If you are just looking to switch personal loans so that you can save on interest and fees, you can try Mozo’s Switch & Save calculator. We will compare your loan with the market and give you a listing of the loans that will save you the most by switching.

What should I look for in a debt consolidation loan?

Bottom line? Low interest rate, minimal fees and flexibility. Without these features and you may not be getting a competitive product.

Opting for a low rate is rule number one when choosing a debt consolidation loan. Because after all, you are trying to ditch your high interest banking products, not acquire more. 

A debt consolidated loan with minimal fees is also always a good idea. Make sure you compare upfront application fees, ongoing service fees as well as exit fees.  

Also aim for flexible repayment options. Find a loan structure that allows you to pay more than the minimum monthly payment so that you can get ahead of the game and pay off your loan quicker. Most variable rate personal loans will enable you to make extra repayments during the loan term.

How can I get approval for a consolidation loan?

Are you creditworthy? According to the lenders you approach, this is exactly what you need to prove. Because, surprise surprise, they’re not going to lend money to just anyone.

Depending on the financial institution you approach, the application process may differ slightly. However, in most cases, there is the option to apply online.

But to better your chances for actual approval on your application, you need to meet minimum requirements. Some of these may include:

  • be at least 18 years of age
  • be employed
  • have a good credit rating
  • never been bankrupt
  • be an Australian citizen or permanent resident.

*The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Polly Fleeting
Polly Fleeting
Money writer

Polly Fleeting is a personal finance writer here at Mozo, specialising in loans and credit cards. Her work is aimed at helping people find ways to make smart product choices, reduce debt and get more for their hard-earned dollars. Polly has a degree in Journalism from the University of Technology, Sydney.