With high interest rates and rising monthly household costs, many debt-ridden Australians are feeling the pinch. To help reduce your debt repayments, you may be considering a debt consolidation loan – combining multiple debts into a new loan, with one monthly payment and one interest rate.
While refinancing can simplify and lower your debt repayments, it can also make it easier to take on more debt. To help you decide if debt consolidation is right for you, this article will provide a handy checklist.
Key takeaways
- Debt consolidation combines your existing debts into a new loan, making one monthly payment instead of juggling different due dates and amounts.
- Common debt consolidation options include secured loans, unsecured loans, and credit card balance transfers.
- By comparing lenders and choosing the right debt consolidation option, you may be able to lower your debt repayments without substantial lifestyle sacrifices.
What is a Debt Consolidation Loan?
Debt consolidation is turning your existing debts into a new loan or performing a credit card balance transfer.
By taking out a secured or unsecured loan, you use the loan money to repay your existing debtors and gradually repay the loan through fixed monthly instalments. With a credit card balance transfer, you transfer the balance of your existing credit card(s) to a new one with a low or zero interest introductory period. By paying off your credit card before the introductory period ends, you could pay less interest than you would have on your previous card(s).
Most major lenders will reject your application if your credit score range is too low. In this case, you may need to approach a lender specialising in debt consolidation bad credit loans. However, you may have to accept less favourable borrowing terms like higher interest rates.
Debt Consolidation Checklist
Below is a checklist of things to consider before you apply for debt consolidation in Australia. Go through each item and, using the information provided, decide which debt management plan is right for you.
Interest Rates and Fees
Aside from simplifying the repayment process, the main goal of debt consolidation is to pay less than what you do now. Therefore, the new interest rate should be lower than the existing one. To do this, work on raising your credit score or offer to accept a secured loan (using an asset, like a car or a house, as collateral) for a lower interest rate. You may also need to choose a fixed or variable interest rate.
Be wary of any associated fees related to account transfers, monthly account maintenance, extra repayments, and late payments. Some loans charge an early repayment fee, where you pay a fee if you repay it all before the loan term is over. Seeing as a new loan may extend the life of your debt, being able to repay early – without penalty – will mean you pay fewer interest charges in the long run.
Number and Size of Debts
If you have multiple debts under your wing, debt consolidation can help simplify and lower your repayments. However, the number and size of your debts, along with your financial circumstances, will determine what you can afford to borrow. For this reason, do some calculations so you know how much to ask for.
First, calculate your existing monthly debt amounts, income, and expenses. Then, using a repayment calculator, choose the amount you want to borrow and the loan type, loan term, interest rate, and repayment frequency. The loan summary will detail how much principal and interest (or just interest) you can expect to pay.
Credit Score
Raising your credit score can help you obtain more favourable borrowing terms. Apply online to request a copy of your credit report from any of the three credit reporting bodies, including Experion, illion, and Equifax. Check for incorrect or out-of-date information and contact the credit reporting agency to fix those errors. You may need to provide additional documentation to verify your claims.
Other ways to raise your credit score are to:
- Pay your bills on time
- Pay off any late payments
- Stay at the same residence and place of employment for six months or more
- Not apply for too many credit products simultaneously (each application, even if unsuccessful, will appear on your credit report)
- Lower your credit card limit (the maximum amount you can spend on the card)
Another way to raise your credit score is to start paying off your debts. You don’t have to repay it all, either. Even a few timely repayments may convince a lender to approve you.
Talk to a Debt Consolidation Expert
Talking to a debt consolidation expert can help you choose the best debt relief strategy.
At Debt Fix, we do more than provide debt relief based on your financial circumstances. We listen, we answer your questions, and we help you make an informed choice. Plus, talking to us is 100% confidential and won’t impact your credit score.
Get started today. Discover how Debt Fix can help you regain financial freedom.
Frequently Asked Questions (FAQ)
Can you consolidate multiple credit card debts?
Maybe. Like regular debt consolidation, credit card debt consolidation allows you to combine multiple credit card debts into one facility.
Does debt consolidation hurt my credit score?
Applying for a debt consolidation loan does require a hard inquiry into your credit report, which will appear on your credit report. For this reason, only apply for debt consolidation if you are confident you will be approved.
When is debt consolidation not worth it?
If your debt amount is small, to the point where you could pay if off within six months to a year, then debt consolidation may not be worth it. However, if you are struggling to repay multiple large debts, then consider a debt consolidation plan.
