Everything to know about loans to pay off debt

Are you thinking about using debt consolidation loans to pay off your debt? When facing financial hardship, it's hard to see a way out. However, consolidating your debts into a single repayment might save you money.

Read our loan guide to determine whether debt consolidation is the right choice.

Let's get to the following commonly asked questions:

• How do I get out of massive debt?
• Can I borrow money to pay off debt?
• Can I get a loan if I already owe?
• What is the smartest way to get out of debt?
• How much debt is normal?
• What are the benefits of debt consolidation?

Q1. How do I get out of massive debt?

Whether you bought a new car or signed up for a home loan, debt can quickly lead to high credit rates and burdensome monthly fees. Sometimes debt is inevitable. However, how you handle your existing debt can make all the difference.

Debt consolidation can help you get out of huge debts. This unsecured personal loan to pay off debt can help you streamline your loan products into a more manageable monthly repayment. 

Once debt free and financially independent, you can pool your money into savings accounts.

Note: Use a repayment calculator to determine if a consolidated loan could save you money.

What is debt consolidation?

Debt consolidation is a personal loan for debt repayments. With one loan, you can pay off multiple debts. This option is easier for many people struggling to manage several payments leaving their bank account at different times. 

Debt consolidation loans are often unsecured loans. You can use them to pay back any type of debt, including car loans, credit card debt, and student loans. Find out whether it's a good option for you with a personal loan repayment calculator.

Q2. Can I borrow money to pay off debt?

Some lenders offer loans to help you pay off other debts. Debt consolidation can help you meet your minimum loan repayment fees. However, you might find that the total loan cost is more significant than separated debt repayments.

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Q3. Can I get a loan if I already owe?

Facing several debts can cause money anxiety. Lenders review your financial situation before offering a loan and personalised rate. If you have several other debts — particularly if you have missed several repayments — they might reject your application.

Alternatively, lenders might offer higher personal loan rates and extra fees and charges. However, lenders could also offer debt consolidation loans with competitive loan rates.  

Important: If several online loan applications get rejected, it will harm your credit score.

Q4. What is the smartest way to get out of debt?

There are several other ways to get out of debt and streamline your repayment options, such as:

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• Credit card balance transfer.
• Making extra repayments towards your loans.
• Reducing your loan term or asking for a lower interest rate.
• Refinancing home loans to fixed interest rates.

Note: Fixed rates aren't always cheaper than a variable rate but will help you manage fortnightly or monthly payments.

Q5. How much debt is normal?

In 2021, the average personal debt was $46,000 in Australia. While this number might seem intimidating, not all debt is bad credit. For instance, most people cannot buy a house without a mortgage. 

If you need to apply for a new loan, ensure it won't adversely affect you. 

• Look at comparison rates to ensure no hidden rates and fees push the cost up.
• Use loan calculators to make sure you can pay back the loan.
• Boost your credit score before applying for more substantial borrowing power.
• Shop around for different debt consolidation loan lenders and negotiate loan interest rates.

Note: If you struggle to pay loans by the due dates, set up automatic payments with online banking.

Q6. What are the benefits of debt consolidation?

Here are some benefits to consider:

• Just one loan means only having one regular repayment to keep track of.
• One interest rate — you don't need to worry about different fees and rates for various loans.
• You might pay less monthly interest if you roll all your debt into one.
• You might pay off your mortgage faster if you adjust your loan repayments to pay the same as each debt.
• You won't risk your car, house, or asset with secured loans. Debt consolidation loans are typically unsecured.
• You could build your credit score by repaying your loan on time.

Note: Mortgage and debt consolidation loans tend to have lower rate ranges.

What are some of the downsides?

Taking on new debt is a big deal. Here are some potential drawbacks:

• It might lower your credit score (only temporarily, it won't affect your long-term credit history). However, you can revive your score if you meet each loan's repayments.
• You might have to pay an establishment fee. 
• The total amount might cost more if you don't get a lower interest rate.
• Your loan application might not qualify for a low rate.
• It doesn't solve debt or the root issues.

Find out if you can afford to consolidate your debts with a loans repayments calculator. You might need to consider a debt agreement if you cannot repay your loan credit. 

Important: Some lenders won't let you consolidate debt with a loan unless you have excellent credit scoring. 

Summing Up

Debt consolidation loans might make your loan repayments more manageable. With just one repayment each month, you'll find it easier to keep track of your repayments and reduce the chances of missing a payment.

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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.