Compare Debt Consolidation Loans and Options

Can a debt consolidation loan apply to my circumstances?

When people decide to make a large purchase, like a car or an appliance, they will often turn to using credit because they can’t afford the purchase all in one go. But the problem with this is that they will usually end up paying more due to interest rates and fees on the loan. What this means, of course, is that making the decision to use credit is easy, but paying down the debt over time can be much harder and end up costing a lot more!

If you’re in this situation, and the money you’ve borrowed for the purchase is more than you can afford to repay, then maybe it’s time to reconsider your options.

What is debt consolidation?

For so many people, paying multiple debts is a real monthly struggle. But what if you could make managing your debts easier through a process called debt consolidation?

When you consolidate your debts, they are all rolled into one large debt. This means that you can take advantage of lower interest rates and fees. It also means that you only have to worry about paying down one single debt rather than keeping track of many debts.

Before doing this, it’s wise to look at all of your existing debts to see if there are any payout fees or refinancing costs and weighing them against the money you will save by consolidating them.

 

When is it a good time to consolidate my debts?

If you’re having trouble paying off your debts, you might be thinking about using debt consolidation as way to make your life easier.

It’s an option that is worthwhile for some people, but is not the best path for everyone, so here’s a checklist to see if you’re the right candidate for debt consolidation:

  • If you’re struggling to keep up to date with your monthly loan repayments then debt consolidation could help you to reduce the amount you have to find each month to cover those repayments.
  • Do you have a low interest credit card with some credit available? If you do, then consider a balance transfer card where you might be able to pay zero percent per annum on transferred balances.
  • If you have a home loan and have equity in your house, the interest rate on the loan is likely lower than a line of personal credit. In this case, you can consolidate your debts into your home loan and pay lower rates.
  • If you have a lot of debt and also have a bad credit record, you should strongly consider debt consolidation as a way to help you manage your finances so that you don’t have to opt for bankruptcy.
  • If you are receiving calls from your credit providers or debt collectors and this is causing you constant stress as you struggle to identify who to pay first and feel pressure from those that are still waiting for payments.

 

What types of debt can I consolidate?

If you’re wondering what kinds of debts can be consolidated, consider the following list of loans that people often apply this process to:

  • Personal loans often attract hefty fees and interest rates, so combining them into one larger debt is a common way to manage them. You can even combine a personal loan and another type of loan.
  • Credit cards also attract hefty fees and some people take out personal loans with lower fees to pay off their credit card debt. This personal loan can then be consolidated.
  • Department store credit cards or other store cards are often used without much thought and can blow out to large debts. This type of credit is a good candidate for debt consolidation.
  • You may also consider other types of loan or credit lines, including other personal or private loans and debts for basic utilities.

 

What debt consolidation options are available?

Once you’ve decided to go down the path of debt consolidation, there are three types to choose from:

  • You can pay off high rate credit cards and transfer their balances to existing credit cards that have lower rates and fees.
  • If you have many debts, you can also consider taking out a personal loan to pay them off. But bear in mind that you’ll need to have a good credit rating to take out the loan and it would be wise to look at a personal loan with a fixed interest rate for a set period of time so your monthly repayment is predictable.
  • If you have a home loan and equity in your house, you can often roll all of your existing debts into your home loan in order to take advantage of the lower rates. But please bear in mind that if you default on your repayments, you may lose your home.

 

How can I work out what my best option is?

If you’re still struggling to work out whether debt consolidation is the best option for you, you can use a debt consolidation calculator. In this case, you input the relevant information, including the total you want to consolidate, how often you make payments and all of the interest rates and fees. The calculator will then tell you what your monthly repayment would be on a single consolidated debt.

If I have bad credit, can I still consolidate my debt?

With the cost of living increasing year on year and large corporations and small businesses making workers redundant in increasing numbers, it is any wonder that more and more people are finding themselves with bad credit. But don’t worry.  Even if you find that you have a mark on your credit file you can still find lenders that will allow you to take out a debt consolidation loan.

What other options are available to me?

While debt consolidation is an option that suits many people, there are other options and avenues open to you that you may not have even considered. Accordingly, before you jump straight into debt consolidation look at whether any of these options might better suit your needs:

  • Negotiate a repayment plan with your credit provider. No credit provider wants to see a client default on their debt. You might be surprised how willing they are to talk with you about a repayment plan that meets their needs and does not place you in financial hardship,
  • Changing from one home loan to another. While this can see you lowering your monthly repayments, changing loans can incur fees to set up the new loan, and penalties for paying out another loan early, so you do want to check the fine print before you sign any new contract.
  • Make an appointment with the Department of Human Services or a not for profit community organisation who provides free financial counselling. These organisations have expert financial counsellors available to help you create budgets so that you can reduce your experiences, create savings plans so that you can put some money away for unexpected expenses, and provide support in negotiating your debts with your creditors.

 

Things to consider before debt consolidation

If you are seriously looking at using debt consolidation as an efficient way to manage your finances and monthly repayments, here’s what you need to know:

  • Make sure that you can meet the monthly repayment cost for a consolidated debt first of all as you don’t want to find yourself getting deeper into debt. You will also want to take into consideration any payout costs you might have to make on existing loans to make sure that paying them doesn’t make the debt consolidation process cost more than it’s worth. If you do end up making repayments on a consolidated debt, you might find you actually have more available credit. In this case, make sure you don’t go into more debt!
  • Compare all of your current costs with the costs you’d make for a consolidated loan. If your existing costs are higher than debt consolidation is a good option for you. Make sure you include all costs in this comparison, including fees, interest rates and exit costs.
  • Be careful about signing up for a debt consolidation loan that transfers all of your unsecured existing debts into a secured loan that uses your home as security for the new loan. Should you find yourself having difficulty making the repayments it is entirely possible that
  • Make sure you check on whether there are any early repayment penalties for paying out existing loans. Include this when you compare your current costs with your costs on a debt consolidation plan.
  • You need to be careful when engaging with lenders that make unrealistic promises by advertising that it doesn’t matter what level of debt you have or what income you generate. There are, sadly, unlicensed lenders that make all sorts of promises and will sign you up to complex contracts that are heavily weighted in their favour and are riddled with fees and charged.
  • To ensure you use a reputable lender, it is important that you use a broker and / or institution that is licensed with the Australian Securities & Investment Commission. You can check their license by conducting a search on ASIC Professional Register or by contacting them by phone.

 

Making debt consolidation work have real long term benefits

In order to optimise the benefits that you can obtain as a result of taking out a debt consolidation loan, you should follow these simple steps:

  • Create a debt management plan which will help you to identify how much you can afford to pay each debtor, when those payments are due, and track the progress of each debt in being paid day to zero dollars. A debt management plan also provides valuable information for your budget so you can see at a glance what your debt obligations are each time you get paid.
  • Create a budget so that you know what your costs of living are each pay period. By documenting your outgoings you can identify areas where you can make savings by reducing expenses. Having a budget in place, and working in concert with a debt management plans, as debts are reduced you will eventually be able to start putting money away into a savings account.
  • Should you find that you have reduced expenses and have a little extra money available each pay period, consider making additional repayments (if you won’t be penalised for doing so).

 

Commonly Asked Questions

You might find that there is some resistance from your bank or other financial institution regarding your debt consolidation options, so here are some answers to commonly asked questions to help you decide if debt consolation is for you and how to pursue a debt consolidation loan:

No, you can consolidate as many debts as your new loan can cover. This includes credit cards, store cards, personal loans, car loans and more.
Yes, if you’re currently receiving a Centrelink benefit, you might still be eligible for a debt consolidation loan. Some lenders consider Centrelink payments as genuine income. Check the potential lenders income criteria – you may have to call.
This is completely up to you. General services of these companies include budgeting services, informal arrangements, debt agreements, bankruptcy and mortgage refinance. Make sure you understand the pros and cons of these services.
Banks generally offer personal loans for consolidation purposes, balance transfers for credit cards and home loan refinance.
No, a debt agreement is not a debt consolidation loan. A debt agreement is a form of bankruptcy and this carries with it other implications for your financial future.
This is based on the amount of debt and individual or family financial circumstances.