Debt consolidation is a product offered by financial service providers in Australia whereby borrowers can merge multiple outstanding loans/debt products into one. Borrowers usually opt for this option when managing multiple debt products becomes burdensome to them and they wish to repay the total amount through a single product.
For example, if you have credit card debt worth $5,000 and another $3,000 owed on a car loan that was taken out four years earlier, and let’s assume you are paying 19.99% per annum on your credit card debt and 9.1% per annum on your car loan, then you could consolidate both of these loans.
To do this, you take out a personal loan of $8,500 with an interest rate of 7.7% per annum and repay both of the loans including any charges incurred on early repayment. By doing this, you would now have only one loan of $8,500 to repay at the rate of 7.7% per year, which is much simpler than managing two loans with different rates, terms, and conditions.
If you are planning to consolidate your debt by taking out a personal loan, here are a few things you should consider.
If you are finding it difficult to repay your existing debt, you should ensure that the consolidated loan will not be more expensive to repay. Also, the repayments should be affordable considering your regular income, as failing to make due payments can lead you into further debt.
Early Repayment Charges
Consolidating your debt would likely require you to repay your existing loans earlier than their stipulated loan term, which can result in early repayment charges (depending upon the lender). If that’s the case, you must incorporate these costs into your consolidated personal loan to evaluate if this would be too expensive for you.
The Legitimacy of the Lender
Make sure the lender you choose for debt consolidation purposes has been licensed by the ASIC to operate in Australia.
Advantages and Disadvantages
|Simplifies your repayments into a single payment||Your overall outstanding debt may increase due to early repayment costs|
|You can potentially reduce your outstanding debt and interest expense||Failing to repay the consolidated debt may result in more debt|
|If you are falling behind on one of your existing loans, you will get back on track|
The Process of Consolidating Debt With A Personal Loan
To consolidate debt, you need to follow this process.
- Calculate the total loan amount you require to completely pay off all existing loans (or loans you wish to consolidate), including any charges and fees you would incur by paying them off early.
- Conduct thorough research on personal loan products and find one that is most suitable for you. This loan should:
- Offer the amount you require.
- Have a repayment term period and schedule that suits your affordability.
- Charge an interest rate that is equivalent to or lower than the total interest expense you were paying on your debt that will be consolidated.
- Be offered by a lender that allows personal loans to be used for debt consolidation purposes.
- Once you have selected a suitable personal loan, apply for it and receive the funds in your bank account.
- Use these funds to repay your debt, including all fees and charges that are incurred for early repayment.
- Repay the new personal loan at the agreed-upon rates, terms, and conditions.
Other Debt Consolidation Options
Apart from a personal loan, you may be able to consolidate your debt with the following debt products.
Balance Transfer Credit Card
In Australia, some credit card providers are offering balance transfer credit cards that allow borrowers to transfer their personal loan balance onto their credit card. Such cards usually come with a promotional time period during which borrowers are charged a 0% rate on their debt. After the expiration of this promotional period, a standard rate, usually 20% per annum, is applied to the outstanding amount.
Tip: This option may be suitable if you believe you can repay the total amount during the stipulated promotional period, as you would save a lot on interest expenses.
Refinancing On Mortgage
You may be able to consolidate your debt by transferring the amount onto an existing mortgage. However, this option should be carefully evaluated as it can end up costing a lot more in interest rate expense over time, even though the applicable mortgage rate on home loans may seem too cheap. Also, some mortgage lenders may also not allow their customers to exercise this option. But, for some borrowers, consolidating their debt into an existing mortgage loan may result in savings in the long run.
Can I consolidate my debt if I have a bad credit score?
Yes, some lenders are willing to offer personal loans to borrowers with a bad credit score, and these loans can be used to consolidate debt.
However, if your credit score is bad enough that you don’t qualify for any debt products for consolidation purposes, then you may consider a Part 9 Debt Agreement, a type of bankruptcy. Under this agreement, a lender will pay off a particular some to existing creditors, and you would repay a specified amount to the lender as per set terms and conditions. You may also lose any assets used to get a secured loan and find it harder to qualify for credit products while you are repaying your lender under the new agreement.
Should I prefer debt consolidation being offered by my bank?
Since you already maintain an existing relationship with your bank, you have a higher chance of being approved for debt consolidation. However, your bank might not offer you the best rate or terms available in the market. Hence, it is always better to compare multiple products before you choose a financial service provider to consolidate debt.
Can I consolidate debt on multiple credit cards?
Yes, in fact, you have a good chance of reducing your total interest expense if you consolidate debt accumulated on multiple credit cards into a single loan product.
I am concerned about my debt and need help. Is there a number I can call?
Yes, you can always get in touch with a free financial counselor by calling the National Debt Helpline at 1800 007 007.