Consolidation loans

Put your hand up if you’ve ever wished upon a star that all your silly debt would just disappear? You’re not alone. At Mozo, we’re not saying that debt is a bad thing. Not at all. It can be a great long term plan, a strategy 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. So if you manage your repayments well, then it could be smooth sailing to owning the house or car of your dreams. Right? Well that’s the goal anyway.

If you’re not careful, bad debt can creep in. We’ve all been there. It’s when you make those cheeky purchases after having paid off a good chunk of your credit card or mortgage off. What you should be doing is celebrating that you’re debt is almost over, not purchase more stuff.

The spending trap people often find themselves in is instead of putting extra income toward your repayments or staying away from using credit after your debt is cleared, you start using the available credit on your card, loan or the equity on your house to start making more purchases. And if these purchases aren’t making you any handsome returns, then your bad debt is here to stay. Unless of course you start consolidating your loans and cut back on spending. Once and for all.

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. It takes the headache away of having to balance your accounts and making sure you have enough for every bill. The good thing about it is it’s one amount that you pay that does not change because the interest usually remains fixed for the life of the consolidated loan.

The best thing but this loan is that as you pay it off you can not purchase more items on top of what you’re already paying, which means the cycle of debt can stop with this loan. So any credit cards you may be happily and steadily be paying off should essentially be hidden out of sight and temptation. Keep it aside for a real rainy day and not just because.

Remember to avoid paying for everyday items with your credit card as this will be a habit that becomes very difficult to break. Cash is king after all. After all, if you don’t enough have cash to pay for everyday items, then you really need to assess your income, the choices in purchases you make and the need for luxury items. Don’t just take it from us. Money Smart - a government site dedicated to helping people like you turn your bad financial situation around.

How does debt consolidation loan work again?

Think of it as a type of debt relief. You’re still paying off what you owe, but at a reduced rate. You can do this by approaching one financial institution to take care of and therefore consolidate all the debts you owe. They may even consider an average of your utility bills so that they’re covered in your single monthly repayment too.

Every financial institution is different. 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.

Who offers comparison debt consolidation loans?

Banks You may be surprised to learn that even your very own bank may offer this type of service. Although tempting to stick with your familiar bank, it may be worth your while 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 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. Taking out a personal loan can often have a percentage rate with repayments that’s a lot more affordable than many credit card rates. 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.

Any extravagant spending could fast track you into a new cycle of spending, which as we all know can put us in a downward spiral. That’s something no doubt you want to avoid.

Credit card transfer This has worked wonders for so many people, and 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 loan, the rate may jump to a super high percentage. 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.

Here’s a scenario So, if you’ve transferred a credit card balance of $10,000 from one financial institution to another at 0% for 12 months, then you will need to pay about $900 per month to get to zero dollars at the end of the term. That’s just under $250 per week to stay on top. If not, you may have to pay hefty interest on top of your balance, which really defeats the purpose of a balance transfer.

It’s better to pay off your balance transfer at regular intervals rather than wait to the end of the term to pay off in a lump sum because you can never foretell your financial situation. Better to be safe and secure than sorry.

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 features should I expect from a debt consolidation loan?

Bottom line? Low fees and flexibility. Without these features and you may be enquiring at the wrong counter.

A consolidated loan with low fees is always a good idea. But as mentioned before, aim for not only low interest fees, but 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 much am I able to borrow with this type of debt reducing loan?

The amount that you will be able to borrow will vary from bank to bank and may be dependant on many other things like how much you earn to how much you owe.

Wondering what personal loan features customers love and hate? Check out Mozo’s bank of personal loan reviews where you can read customer reviews from all banks and lenders in our database.

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. Surprise surprise, they’re not going to lend money to just anyone. Depending on the financial institution you approach, the application process should usually be quick and easy - especially great when you’re short of time.

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.