Can I get a loan to pay off debt?

Are you struggling to pay off multiple debts? When each monthly repayment seems like one too many, you may want to consolidate your debts. Getting rid of debt and reaching financial independence are rewarding life moments.

So, can you get a loan to pay off all your debts?

Let's get to the following commonly asked questions:

• Can I borrow money to pay off debt?
• What is debt consolidation?
• Who should consider a debt consolidation loan?
• Can I get a loan if I already owe?
• How can I get out of debt if I can't get a loan?
• Does taking out a loan to pay off debt hurt your credit?
• What are the pros and cons of debt consolidation?
• How do you apply for a debt consolidation loan?

Q1. Can I borrow money to pay off debt?

People borrow money for various reasons—from medical bills to car purchases. But, did you also know you can borrow loan amounts to pay off your debt?

You should consider consolidating your existing debt if you're tired of making multiple regular repayments from your bank account to monthly debts. Debt consolidation loans might help you begin saving money for super funds and achieve financial independence.

Q2. What is debt consolidation?

A debt consolidation loan is like a personal loan for debt. Essentially, you take out one loan to pay off multiple debts. You then make direct monthly payments to one loan's lender. 

A loan to consolidate debts will help you pay your mortgage, car loan, and credit card debt sooner. 

Note: Check debt consolidation personal loan rates to ensure you get a good deal.

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Q3. Who should consider a debt consolidation loan?

If you're struggling to make debt repayments each month, you should seek financial advice. Taking out one personal loan to pay all your other debts may help your situation. 

It can work in your favour if you have high loan rates on several secured loans. Unlike unsecured loans, secured debts risk your valuable assets when you cannot repay them—like your car or house. 

With a lower interest rate on a consolidation unsecured personal loan, you might pay less money overall. Similarly, if you have variable rate loan products, you may wish to consolidate your debts with fixed interest rates when rates rise.

Q4. Can I get a loan if I already owe?

When you submit a loan application, mortgage lenders consider your borrowing power. If you have multiple unpaid debts, this typically impacts your chances of being offered reasonable mortgage rates.

You may have to consider a debt agreement if you cannot get out of debt yourself. 

Important: If you don't meet the lending criteria and the lender rejects your application, this could damage your credit score.

Q5. How can I get out of debt if I can't get a loan?

Debt consolidations are for people with multiple debts. You can pay off your credit card balance, home, car, and other personal loans. 

If you don't qualify for a loan or don't like the idea of a loan for debt consolidation, there are other ways to repay your debts.

1. Balance transfer credit card: With a credit card balance transfer, you move your debt from one account to another with better credit rates.
2. Extra repayments: Making extra repayments towards your loans could help you repay them sooner.
3. Mortgage refinance: Use a mortgage calculator to determine whether home loan refinance rates are better than your current deal.

Q6. Does taking out a loan to pay off debt hurt your credit?

Taking out a loan may hurt your Australian credit score. However, this bad credit score is temporary. When you apply for any loan, it might cause your credit score to dip.

In addition, combining your debts into one and closing accounts might hurt your credit utilisation, which could also show up on credit reports.

Note: If you're not good at repaying debt, consider using debit cards instead of credit.

Q7. What are the pros and cons of debt consolidation?

When you consolidate debt, you might relieve your financial hardship and simplify loan repayment. Use a repayment calculator to work out how much you might save.

Pros of debt consolidation loans

The key benefits of debt consolidation:

• You might repay your secured personal loans, mortgage, and car loan sooner.
• Your finances are simplified with one manageable monthly repayment amount. Use internet banking to keep track of your loan option.
• Lower interest rates and a longer loan term mean more affordable loans. You might get a personalised rate if you speak to a lender about your situation.
• Fixed personal loan repayment schedule—unlike a flexible loan, debt consolidation means paying everything back in one payment.
• Over the long term, you will boost your credit score because it is easier to make on-time repayments.

Cons of debt consolidation loans

The downsides of debt consolidation:

• Upfront fees and charges apply, such as balance transfer costs or closing fees.
• It won't solve your financial situation, but it may ease the burden of several loan repayments.
• You might pay a higher interest rate. Use a loan repayments calculator to calculate whether the rates range is within your budget.
• Missing payments might cause unwanted monthly fees.

Q8. How do you apply for a debt consolidation loan?

If you are considering taking out a new loan, you should use loan calculators and check comparison rates to ensure it is the right decision.

You can apply online for a debt consolidation loan. The lender will then inform you of their loan approval decision.

Summing up

If you find your financial situation struggling, consider using debt consolidation to pay off debt. Check whether the rates and fees make the loan product more affordable than your current situation. 

Seek professional advice to determine whether this is the right choice for you.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.