Debt consolidation loans in Australia
When your budget links to several credit accounts, trying to cover everything can be stressful. Not to mention the borrowing costs that dry up your cash flow even further. Use our handy guide on debt consolidation loans and find the best exit plan for your multiple-debt situation.
What’s a debt consolidation loan?
Debt consolidation loans allow you to wrap all your debts into one personal loan bundle. Borrowing money to cover your debts might seem like a bad idea. But, when done right, you can expect the following pluses:
- Reduced costs. When you roll your credit card debt, car loans, personal loans, or other types of debt into a single account, you only have to pay fees and interest for that one loan. Most loans come with ongoing fees and upfront costs. By doing away with these, you can realise big gains on your savings.
- Manageable repayments. Since you now only have to deal with a single repayment, keeping track of your credit responsibilities becomes seamless. On top of that, having manageable repayments means you’re less likely to default.
- Better loan features. Your debt consolidation personal loan may come with certain upgrades. For instance, some lenders offer personal loans with “extras” like redraw facilities and the ability to make zero-cost or low-cost early repayments.
How does a personal loan work when consolidating debt?
Here’s what you need to do if you want to stay on top of debt that’s getting out of hand:
- Do your calculations. What’s the total count on your existing debt? That’s how much you need to borrow, for starters. Next, find out how much in fees you’ll need for the early pay-offs and add that to your required amount.
- Compare debt consolidation loans. Use BestFind’s product table to run through your list of available options and find out which offer or lender pairs up with your needs. During your personal loan comparison, your checklist may include factors like the interest rate, fees, amounts, terms, and repayment flexibility.
- Carry out more calculations to estimate your repayments. Our debt consolidation loan calculator displays your repayments once you tell it how much you want to borrow and for how long. Keep in mind that smaller instalments leave more room in your budget. However, if you choose larger payments, you can pay off your debt faster to maximise on interest savings.
- Apply and receive the funds. Once you find a loan with features that fit the bill, you can get going with your application. Simply click the right “Go to Site” button and submit a completed personal loan application on the lender’s website.
- Pay off your debt and keep up with the repayments. Use the cash flow boost to clear out your accumulated debt. This leaves you with that one personal loan which you have to pay back in regular instalments.
Do you need to consolidate only your credit card debt? Check out our guide on the best way to get a handle on this type of credit.
When is the best time to consolidate debt?
Debt consolidation may not be the solution to every niggling credit problem you come across. But in specific instances, doing so constitutes a great move:
- High interest rates on multiple loans. In worst-case scenarios, a steep rate might increase the total cost of your debt by thousands of dollars. Fortunately, you don’t always have to see a bad deal through to the end. Instead, you can replace all your expensive loans with a single low-interest loan.
- Too many loan fees. Likewise, numerous loan charges can drain your finances and potentially trap you in a debt cycle. A cheap personal loan ensures that you pay off your debt as quickly as possible to reduce finance costs.
- Mixed due dates. If the due dates for your debts are all over the place, it’s easy to overlook one or two repayments. Missed repayments tend to appear as a blemish on your credit profile. Additionally, you risk losing your asset or racking up penalty fees that will stress you more financially. However, with a debt consolidation loan, you’ll only need to circle one date on your calendar.
- Problems with budget allocation. Sometimes, it’s challenging trying to figure out which debts need to be taken care of first. Once you only have a single repayment demanding your attention, things become more straightforward.
- Valid proof of outstanding benefits. It’s crucial to weigh the drawbacks and benefits of taking out a consolidation loan before attempting to do so, especially in terms of cost. Overall, rolling your debts into one should have more positives than downsides for it to be worth it.
What are the available types of debt consolidation loans?
You can attach a variety of features to your debt consolidation loan. When settling on a choice, it’s best to consider your options in light of your circumstances. Remember, the right loan can bring sizeable financial rewards, but a misguided choice can equally cost you. Let’s take a look at the main types of personal loans:
- Secured. If you opt for this type of debt, you’ll have to put up collateral that backs or guarantees the loan. Collateral can be an asset like a car, house, property, or even a savings account. In this agreement, the asset will belong to the lender if you fail to repay. Because the lender has this assurance, secured personal loans tend to have lower interest rates and fees.
- Unsecured. With an unsecured personal loan, you don’t sign up your asset for collateral use. However, since the finance provider has nothing to hold fast to when you default, the financial risk pushes them to drive rates and fees up.
- Fixed interest rate. You can go for a fixed rate that won’t budge during the repayment period. That means your budget and payments stay consistent throughout without any dips or jumps. But, it also follows that you won’t see much in the way of interest savings when market rates fall.
- Variable interest rate. On the opposite side, a variable rate may go up or down out of the blue. If it moves up, you can expect higher repayment amounts. Although it can make budgeting tricky, you do get to keep more money in your pocket if the rate falls.
Debt consolidation must-knows
- Tally the costs thoroughly. At first glance, it’s easy to assume that a new loan might be cheaper. But, even if the rate looks great, you also have to consider other costs such as application and establishment fees. Also, keep in mind that switching to a lengthier term translates to more fees and interest charges. As an extra tip, eliminating your unsecured debt and replacing it with a single secured loan works if low rates and fees are your top priority.
- Negotiate. Some lenders set nothing in stone, which means you can approach them to work out a more flexible solution for your finance needs. Whether it’s to restructure your repayments or to extend due dates, try and communicate with them for best results.
- Get familiar with the terms and conditions. The essential details of your loan will give you a clearer picture of how the loan works, the requirements, and any hidden fees. To top it off, you can estimate how flexible the loan is in terms of extra repayments and due dates.
- Pay off your debt quickly. When you speed up the frequency of your repayments, you get the best of both worlds. On the one hand, you get a lump sum that frees you from unmanageable debt. On the other, this freedom comes at the lowest possible cost.
- Minimise the chances of missed repayments. Most debt consolidation loans have a common theme that involves simplifying the way you manage your debt. With direct debits, for instance, you never have to worry about payment slip-ups. In the long run, you’re more likely to avoid late fees, legal action from the lender, a dropped credit score, and other losses.
Top mistakes and risks to avoid when choosing a debt consolidation loan
Here are few debt consolidation don’ts you can follow to avoid the pitfalls of costly debt cycles and other traps:
- Not verifying your lender’s reputation. Some lenders are in the business solely to make a profit, and this is usually synonymous with predatory practices. Stay on guard and always deal with licensed credit providers that offer realistic products. Keep an eye out for scammy lenders who pressure you to sign documents while failing to reveal all loan costs during the application process.
- Using a home loan for debt consolidation. When you roll your debts into your mortgage or home loan, you may end up paying more in the long run. While home loans typically have competitive rates because of their secured nature, they also have longer terms. For this reason, you might have to shell out more from your pocket over the life of the loan, just to cover finance costs.
- Using credit cards. If you utilise this line of credit to cover your debts, or to sustain your spending habitats, it’s good to remember that credit cards generally don’t hold back in terms of interest rates and charges. They’re more likely to lead you further into the deep hole of crippling debt.
- Taking out more debt. Once you take home your easy-to-manage debt consolidation loan, you may be tempted to take out another loan. However, any long term money problems will generally not be solved with borrowed money. The best approach is to get out of debt in record time and to avoid using loans as a financial crutch, after that.
3 resources that will help you overcome your debt struggle
- Credit counselling. Professional advice from a financial counsellor can help you pinpoint the right personal loan for you. You may also get valuable guidance if your finances are in a critical state that requires a debt management plan (DPM).
- National Debt helpline. This not-for-profit organisation has helped thousands of Aussies with their debt problems. They offer free and independent financial counselling that can help repair any financial fix you may find yourself in.
- Legal Aid offices. Debt problems sometimes give birth to legal action that’s taken against you by finance providers. Community Legal Centres are your free, go-to option if you need legal backup during this process.
Pros of debt consolidation loans
So, is debt consolidation worth it or not? We wrap up the pros in a nutshell:
- A single repayment with one due date
- Easier budgeting
- Potential interest and fee savings
- You’re less likely to default if your repayments are manageable
Cons of debt consolidation loans
Let’s round up some debt consolidation downsides, as well:
- It’s not always the cheaper alternative
- You may end up owing more if you borrow extra on top when consolidating your debt
- The market is susceptible to lenders who attract clients with unrealistic promises
More answer to your questions about debt consolidation loans
Where can I find a debt consolidation loan in Australia?
Australian financial services providers include banks, peer-to-peer lending platforms, and credit unions. That means you have a variety of products to choose from. To start with the selection and comparison process, simply go through our comparison table above until you find the best fit.
How much can I get to cover my existing debts?
Generally, for loan amounts, the range extends between $1,000 and $100, 000. However, the amount you get approved for depends on the lender’s limits, your income, your credit history and other factors.
Can I get a debt consolidation loan if I have bad credit?
If you have missed repayments showing up on your credit history, this can make it difficult to qualify for a personal loan. Furthermore, continuing to submit applications with other lenders after a rejection will further damage your score. The best action to take if your debt is overwhelming you is to talk to your lender or to seek help from financial experts.
Which personal finance tips can I use to reduce and manage my debts?
You’re never completely helpless when it comes to managing your debt on your own. Here are a few tips that will keep you afloat and out of debt:
- Build an emergency fund
- Search for extra money-making gigs
- Create a reasonable monthly budget and honour it as much as possible
Do I have to switch banks to get a debt consolidation loan?
This depends on the kind of products you have access to with your current lender. While you may be motivated by loyalty and the need for convenience, it’s best to compare loan options. You may end up going with a different lender once you realise the competition offers more benefits.
Learn more about debt consolidation in this short video
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