The definitive guide to debt consolidation loans Australia

WeMoney

Australia has some of the highest levels of personal debt in the world. According to RBA data, the total amount of outstanding personal debt in Australia as of September 2020 was almost $155 billion. And as long as your debt is at a healthy level and is well managed, it can help you reach many financial goals like buying a new car or your own home.

Unfortunately for many Aussies, it is very easy for debt to quickly get out of hand when you’re paying off multiple debts from various providers, all with different payment deadlines. It can be exhausting juggling payments for your mortgage as well as personal loans, credit cards, debit cards, and other utility bills. And it’s just got a little bit harder now that Buy Now Pay Later options have been thrown into the mix.

If this seems familiar, and you’ve been struggling to keep on top of repaying all of your existing debts on time, there are a few options available to you. One of the smartest ways to start getting back on top of your finances via debt consolidation.

In order to help you determine whether or not it would be suitable for you, this personal loans guide will explain everything to compare debt consolidation loans in Australia. What they are, how they work, and anything else you need to know about them so you can start getting your finances back on track again.

Let’s get to the following commonly asked questions:

  • What is a debt consolidation loan?
  • What types of debt consolidation loans are available?
  • Who applies for debt consolidation loans in Australia?
  • What are the benefits of a debt consolidation loan?
  • What are the risks of a debt consolidation loan?
  • Can I apply for a debt consolidation loan with a bad credit rating?
  • Is debt consolidation right for me?
  • How to seek financial help?

Q1. What is a debt consolidation loan?

If you’re repaying multiple credit cards, car repayments, standard personal loans, Buy Now Pay Later accounts, a mortgage, bank accounts, or any other combination of personal debt, chances are you’ll be paying back more in interest and other monthly fees than you’d like to. Rather than having all of these repayments due monthly weekly fortnightly, a debt consolidation and refinancing loan combines all your unpaid debt into a single low-interest unsecured personal loan.

Basically, your bank or another finance provider will pay the total amount of your outstanding liabilities from all sources, so you only have one debt you need to manage and pay back. Not only will this simplify your debt management with only one easy to remember repayment, but it can also help you reign in your debts and reduce the total interest due so you can pay everything off sooner.

Q2. What types of debt consolidation loans are available?

When you want to refinance using traditional methods of debt consolidation, the two main options available are a debt consolidation loan or a balance transfer credit card. Once you have been approved for either debt consolidation method, the money will be used to pay off your outstanding debt which you’ll then pay back over a specified amount of time via monthly repayment options.

The first option for debt consolidation involves either taking out a new rate personal loan for debt or extending your available credit from an existing debt like a mortgage to combine and pay off all your debts in full. Once you’ve applied and been approved for a debt consolidation loan or extension, it will usually be at fixed interest rates which results in the same total amount of debt via only one loan rather than multiple ones.

Note: With the second option of a credit card balance transfer, all of your existing providers' debts are transferred onto a new card with low or even zero percent interest. Keep in mind that these reduced interest rates will generally only be available for a limited time. That’s why it’s important to make sure you can afford to pay off all of your transferred balance as fast as possible during the initial promotional period.

Q3. Who applies for debt consolidation loans in Australia?

A debt consolidation loan is typically used by someone with multiple forms of debt with variable rates and repayment schedules. With one easy to manage payment to make each month, they can simplify their finances as well as removing multiple interest rates, account keeping fees, and other excess costs.

This is especially handy for anyone with high-interest debt repayments such as store credit cards debt. When someone consolidates all of their outstanding debts into one loan, it allows people to regain some control over their financial situation and focus on their debt repayment strategy.

Recommendation: By using only a single regular loan repayment, with one interest rate, one set of fees, from one provider — management of finances instantly becomes much simpler. And by rolling everything into one single debt with lower interest rates, it also has the potential to reduce the total of how much money they’ll end up repaying overall.

Q4. What are the benefits of a debt consolidation loan?

It’s important to understand that while a debt consolidation loan can be much cheaper and easier than paying off multiple debts, it doesn’t somehow make all of your debts simply disappear. And just like with every other financial product, there are pros and cons to consider.

Whether you want a Harmoney unsecured personal loan, NAB personal loan, SocietyOne unsecured loan, or a loan from any other Australian bank, you should make sure a debt consolidation loan term is suitable for you and your specific financial situation.

There are quite a number of benefits to most people when they take out a debt consolidation loan. Budgeting your finances is instantly much easier when you only have one easy all-in-one repayment each month. With only one debt, you can also reduce account keeping fees, overall payments, and potentially even lower your interest rate.

Note: As long as you’re making repayments over the minimum amounts, a low rate of interest means you’ll also end up paying much less than the total of your original debts. And once all your finances are back under control, you’ll no longer have to deal with debt collectors.

Q5. What are the risks of a debt consolidation loan?

Before you go signing on the dotted line for a debt consolidation loan, you need to also consider the risks involved just like any other financial commitment to ensure it’s the best choice for you. You also don’t want to end up owing money to some dodgy lender who prey on people who are struggling financially. So check the legitimacy of your lender by asking for their ASIC license and check it online yourself, as it proves they can legally operate in Australia.

Many debts also have additional costs in the fine print for termination like early repayment fees, which should be included in your budgeting calculations. Setup charges and annual fees can also sometimes apply, so you should always attempt to secure the lowest interest rates based in order to offset all of these fees and charges.

Paying off a debt consolidation loan over a longer term can also mean you’ll end up paying more interest, so it isn’t always going to be the cheapest available option. That’s why it’s a good idea to use a fixed rate personal loans calculator, loan repayments calculator, repayment calculator, or check multiple loans calculators so you can be precise when you’re working it out.

Note: If you want to consolidate your debts, it may make your debts easier to manage, but you will still need to assess whether your new loan will be within your budget. It’s crucial to make sure you’ll always at least be able to cover the minimum repayments for your new debt. Because defaulting on the loan means added late rates and fees, possible higher interest, and the threat of negatively affecting your credit score. Unfortunately, loan approval can become difficult if you’ve already defaulted on existing debt repayments.

Q6. Can I apply for a debt consolidation loan with a bad credit rating?

Unfortunately, not everyone has an excellent credit history. Whether you’ve recently lost your job, or your debt repayments have been out of control for other reasons, a debt consolidation loan might be an option you’re interested in. But what about if you already have a bad credit rating? While a debt consolidation for someone with bad credit may still be possible, it may not be the best idea to apply without checking your current credit score.

It’s usually quite unlikely that a debt consolidation loan application would be approved if you already have a bad credit rating. And any rejected application for credit may end up causing further damage to your credit rating.

Suppose you do already have a bad credit rating and have been struggling to keep up with your loan repayments. In that case, you should contact your creditors immediately so you can create an appropriate financial plan together. Alternatively you can also talk to a professional financial counsellor about your financial hardship or discuss entering into a debt agreement

Because bad credit can happen to anyone at any time, WeMoney has partnered with Experian so we can monitor your credit reports for you. We can identify all credit enquiries and events, so we can alert you about any credit score changes once each month.

Note: With a 360 degree view of all your finances in one place, you can also use WeMoney to track all the money in your transaction and saving accounts. Also, eliminate any sneaky subscription services you’d completely forgotten you were still paying for. Stay on top of your finances and never miss a payment again with WeMoney.  

Q7. Is debt consolidation right for me?

The most important aspect to consider before taking out a personal loan with fixed rates to consolidate debts is affordability. Because the last thing you want to do is creating more debt you’re unable to pay. In order to avoid making your financial situation any worse than it already is, you need to make sure you’ll be able to afford making all the repayments of your new debt consolidation loan. Don’t forget to include any additional interest and ongoing fees your new loan may have.

So, before you decide to take control of your finances by consolidating your debt, it’s essential to work out exactly how much you owe. Start by calculating the total of your combined debt from all creditors by looking at all of your credit statements and loan contacts. You need to know how much money you owe for each debt, as well as individual interest rates, monthly charges, comparison rates, and if they have any early payment or exit fees.

Recommendation: Once you understand where you stand financially, you need to fully explore your options for debt consolidation. Remember to also make sure that whatever debt consolidation method you choose is suitable for the type of debt as well as your financial situation. You should also confirm the total amount of refinancing will be cheaper to repay than all your existing debt combined.

Q8. How to seek financial help?

When you’re juggling multiple payments on multiple dates for multiple debts, it can quickly become very overwhelming. If you’re over all the multiples, it might be time to make a simple change by consolidating your debts. Because managing debts is always much easier if you only have one loan, with one interest rate, and one monthly payment. Remember too that the earlier you start taking action, the better off your finances will be.

Recommendation: To ensure getting a debt consolidation loan is the best approach for you; you should consider asking for independent financial advice after reading loan guides. But if you are really struggling to manage your debt or you’re in serious financial hardship, you can call a financial counsellor from the National Debt Helpline on 1800-007-007 during business days or online at ASIC Money Smart’s website.

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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.

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