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Debt consolidation loans

Debt consolidation loans rolls over multiple loan repayments into a single debt. Find out if it's right for you.

10 October 2022Douglas Crowley 6 min read
Debt consolidation is a way to refinance or consolidate outstanding debt or loans that attract a very high-interest rate. It involves rolling over multiple loan repayments, such as car loans and home loan instalments, into a single debt and repaying that on better terms.

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For a vast majority of borrowers, repaying multiple debts at the same time can be an uphill battle.

If you are tired of juggling payments, opting for debt consolidation loans can be incredibly useful for streamlining your finances and helping you save money. This article tells you everything you need to know about such loans.

Debt consolidation is a way to refinance or consolidate outstanding debt or loans that attract a very high-interest rate. It involves rolling over multiple loan repayments, such as car loans and home loan instalments, into a single debt and repaying that on better terms.

Borrowing small debt consolidation loans is a way to carry out debt consolidation. Such loans are offered by traditional lenders such as banks, financial institutions, and credit unions.

Here’s how personal loans for debt consolidation can help:

You can manage your repayments better

When you consolidate outstanding loans, you no longer need to make multiple repayments every month. As you only need to make a single repayment, it becomes easier to stay on track.

You can become debt-free sooner than expected

When you borrow for loan consolidation, you can pay off your debt faster than you had initially anticipated. As debt consolidation loans have a lower interest rate, it is possible to make extra repayments every month to reduce the outstanding amount.

You can improve your credit score

Since a personal loan for debt consolidation simplifies your repayment schedule and helps you to stay on track, you are less likely to miss or delay repayments. This can, in turn, increase your credit score, improving your chances of borrowing other loans, such as a home loan, at a competitive interest rate.

When you consolidate debt using a loan, you borrow a personal loan and use that to pay off your debts. This helps you save money as the interest rate of the loan borrowed is usually lower compared to what you are paying on individual debts. Getting a personal loan for debt consolidation also reduces the number of payments you need to make. As you roll over all your debt obligations into a single payment, it becomes easier to manage and repay on time. This also provides you with a better idea about when you can become completely debt-free.

Having said that, even the best debt consolidation loans in Australia make sense only if the cost of borrowing such a loan is lower than your outgoings for the current loans combined. So you need to ensure that you work out what you are paying at present and what you will pay if you take out a debt consolidation loan.

Here are the different factors to compare when considering debt consolidation loans in Australia:

Interest rate

This is a crucial factor as it determines the chunk of the total cost of borrowing loans to consolidate debt. You can choose between a fixed interest rate or a variable one. Variable interest rates for personal loan consolidation may not be a good idea as the interest fluctuates with market conditions, and you may never know when you need to pay more instalment than expected.

Any additional fees

Apart from the interest rate, debt consolidated loan also attracts several additional fees. These can quickly add up and increase the cost of borrowing. Check the fine print of the loan agreement for loan application fees, fees for delayed payment, prepayment penalties, maintenance fees, monthly fees, and redraw fees.

Loan terms

The time you have to repay your consolidation loans is important. It is best to avoid a longer term than what you currently have as you may end up paying more as interest. Typically, loan term ranges between one to five years, but it is not unusual for lenders to offer loans up to seven years.

Repayment terms

When borrowing a consolidation loan, make sure to pay attention to the repayment terms:

  • Will the lender allow additional repayments without charging a prepayment penalty?
  • Can you decide whether to pay monthly, fortnightly, or weekly?
  • Will you get an option to redraw the extra repayments when you are in need of cash?

Remember that there is no silver bullet to discovering the best debt consolidation loans. Make sure to use a loan calculator to compare the various options. The more you compare debt consolidation loans, the better your chances of finding one that suits your needs.

A debt consolidation loan impacts your credit score in the same manner that other personal loans do.

When you apply for such a loan, the lender conducts a credit check, and this is recorded in your credit report as a hard credit inquiry. As is the case with personal loans, reaching out to multiple lenders within a short period results in multiple hard inquiries. This can adversely impact your score. If you fail to repay the debt consolidation loan instalments on time, it is reported to the credit reporting agencies and recorded in your credit report. This can also lower your score.

The only exception to this is a no credit check debt consolidation loan. Lenders extending such loans do not perform any credit check to decide on your application. Since they only perform soft credit pull, your score remains unaffected.

But debt consolidation loans can also help you to improve your existing score. When you maintain a good repayment track record, it is reported to the credit rating bodies as part of comprehensive credit reporting. Positive credit events show that you are a responsible borrower and pull up your score.

Here’s what you need to do to apply for debt consolidation loans in Australia:

You should fulfil the eligibility criteria. While the exact requirements vary depending on who you approach, usually, you must:

  • be at least 18 years old,
  • be an Australian citizen or a permanent resident; and
  • have a stable source of income

You should perform a debt consolidation loan comparison online and shortlist a lender. Next, you must fill out the application form online or in person by visiting the lender’s office.

You need to attach supporting documents such as proof of income, proof of residence, and proof of identity. You also need to provide a list of loans you want to consolidate. The lender may ask you for additional documents.

Based on your credit report and application, the lender will decide whether you are eligible for any loans for debt consolidation. The amount and lending terms may be decided based on your credit score.

Yes, here are a few options if you are considering debt consolidation loans for bad credit

Opt for an unsecured personal loan

Several specialist lenders in the market offer unsecured personal loans for bad credit. Compared to a secured debt consolidation loan, the interest rate of these loans tend to be higher.

However, debt consolidation for bad credit can still help you consolidate loans into one payment and reduce the total amount you currently pay.

File for a Part 9 Debt Agreement

Opting for a debt agreement is similar to filing for bankruptcy. In case you have a large sum of debt that you are unable to repay, you can approach a financier. They can strike a deal with your lenders to ensure that your outstanding debt doesn’t attract any interest. Lenders agree to a specified repayment schedule within which you must pay off your debt or at least a part of it.

However, be aware that a Part 9 Debt Agreement will appear on your credit report and stay on for five years. This can bring down your score and make it difficult to borrow money from the market.

If you are unable to find the right loan to consolidate debt, here are some alternatives:

Balance transfer credit cards

This is an excellent choice for consolidating credit card debt. It can help you to merge credit card debt across multiple cards and roll them over into a single payment. Balance transfer credit cards to consolidate credit card debt usually offer zero percent APR during the introductory period.

If you can pay off your debt during this time, you can save on interest. Once the introductory period is over, the regular APR kicks in, usually higher than what you pay for regular purchases.

Usually, balance transfer cards only work for credit card debt consolidation. However, some card companies may permit you to transfer outstanding personal loans to your credit card. Make sure to check with the credit card issuer before you apply.

Debt settlement

Another option for debt consolidating is through negotiations with the lender to reduce the amount you need to pay. You can either do it yourself or appoint a debt settlement company to speak on your behalf. In most cases, lenders waive off the interest and only demand payment of the principal amount. However, this can result in your credit score going down. So use it only if you cannot find any other way for debt consolidation in Australia.

If you find it increasingly difficult to repay your outstanding debts that charge a high-interest rate, opting for a debt consolidation loan can be helpful. You can avail of this option regardless of your credit history. In fact, you can leverage debt consolidation loans to improve your credit score.

Before applying for any debt consolidation loans, make sure to check your credit score to better understand your eligibility for loan offers. ClearScore allows you to get free credit reports and check credit scores at any time. Take a look.

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Written by Douglas Crowley

Senior Partnerships Manager

Doug loves to work with lenders to get ClearScore users the best deals