Debt consolidation loans Australia

What are debt consolidation loans?

A debt consolidation loan is generally just a personal loan. But instead of taking out money to cover a holiday, car or other purchase, you're using the money to pay off outstanding debts.

The goal with debt consolidation is to combine multiple debts, each with different interest rates and fees, into a single personal loan. Done correctly, you should save money by having a single, more manageable repayment. Not only does this mean more money in your pocket, but also makes budgeting much easier.

You need to make sure the new loan works out to be more cost-effective than keeping your existing debts separate.

What debts can I consolidate with a personal loan?

• Credit card debts.
• Other personal loans
• Car loan debts.
• Buy now, pay later debts.

How to consolidate your debts in 5 simple steps

1. Take stock of your existing debts. Work out how much you're paying each month in fees and repayments. Count up your total remaining debt amounts so you can work out how much to borrow.
2. Compare personal loans and find a suitable loan. Look for a new loan with a lower interest rate and minimal fees.
3. Crunch your costs. Before applying for a new loan, use a loan calculator and make sure the new repayments will be lower than what you're currently paying.
4. Apply for the new personal loan. During the application make sure you select 'debt consolidation' as the purpose of the loan. This means the lender's assessment team knows that you will be paying off outstanding debts with the loan (these debts will show up in your credit report).
5. Once approved, pay off your outstanding debts immediately. Make repayments on your new loan until it's paid off.

If you feel overwhelmed by your debt, you're not alone. According to Finder's Consumer Sentiment Tracker, the average Australian has $20,762 in personal debt. This includes car loan, personal loan, buy now pay later and credit card debt. Debt consolidation can make these debts easier to manage. Just make sure your consolidation loan works out cheaper in terms of fees and interest - monthly and over the life of the loan.

Richard Whitten
Money editor

Example: consolidating 3 debts into one personal loan

You have 3 debts you wish to consolidate. For the sake of simplicity we're assuming each of these debts has a 3-year term.

Over 3 years you would end up paying:

• $16,500 in remaining debt
• $3,764 in interest + fees
• For a total of: $20,264

Now, if you took out a single $16,500 personal loan over 3 years with a $10 monthly fee and an interest rate of 10% you'd have repayments of $543 a month. This means you would end up paying:

• $16,5000 in remaining debt
• $3,027 in interest + fees
• For a total of: $19,527

This works out to be $30 a month cheaper and would save you $737 overall.

Debt consolidation can be an extremely useful way to reduce your overall debt (particularly when it comes to interest repayments) while also enabling you to pay it off more quickly. However, it can mean that your credit rating takes a hit -- so if you're thinking about borrowing again in the near future, you'll need to weigh this up as a consideration.

— Tom Goodwin, Commercial Content Editor

Pros and cons of debt consolidation

Is a debt consolidation loan the right option for me?

Whether or not a debt consolidation loan is the best option for you will depend entirely on your personal situation, and if you are really struggling you should consider calling the free National Debt Helpline for advice on 1800 007 007.

Generally speaking though, you should consider a debt consolidation loan if:

• Your credit score has improved since you took out your existing debts
• You have multiple debts from different lenders and are struggling with the various repayments
• The lower interest rate on your new loan is enough to cover potential early repayment or break fees from your old loans

Another thing to consider is that, since this is a new loan, your loan term will be reset. This could be a good or a bad thing depending on your goals.

• If your goal is to reduce your monthly repayments, this new and longer loan term will ease the strain on your day-to-day budget.
• If your goal is to pay off your debt as soon as possible, the longer loan term could end up costing you more in the long run. However, if your new loan allows free extra repayments then you can use any extra cash to pay your loan off much sooner.

Does debt consolidation hurt my credit score?

In Australia, debt consolidation loans won't necessarily harm your credit score, but as with all credit this depends on a few things.

Any loan can damage your score if you apply for too many different loans at once or miss repayments. But meeting every payment on time and fully paying off your debt can improve your score.

Multiple debts, especially high interest debts, can also affect your score. So consolidating these debts and successfully meeting the payments of your new loan can be an overall benefit to your credit score.

You should also try to take steps to improve your credit score before applying for the loan. And don't apply for multiple loans at once.

Alternatives to debt consolidation

Talk to your lenders about hardship arrangements

If you're really struggling with debts, getting a new loan might only make matters worse. Borrowers in distress should consider talking to their current lenders before they start missing repayments.

Lenders and credit providers offer hardship assistance support for customers. This includes financial counselling, temporary repayment pauses or restructuring of your debts.

Talk to a financial counsellor

If you're struggling with debt and need help you can speak to a counsellor from the National Debt Helpline for free on 1800 007 007.

Refinance your existing debts

Your current lenders and card providers may have similar products with lower rates on offer. Refinancing a personal loan debt could save you money and be a suitable alternative to consolidating your debts.

Balance transfer credit cards

If you have multiple credit card debts you could consolidate them into a single card with a balance transfer credit card. These cards offer a 0% interest period which can help you get your debts under control. This period typically lasts between 12 and 34 months.

But if you don't repay your debt during the 0% interest period you'll be charged a high interest rate.

There are some card providers that even let you transfer personal loan debt to a balance transfer card. But you'll need a good credit score.

Home loan debt consolidation

If you have a home loan and you've been making regular repayments your lender may let you refinance the loan to consolidate other debts.

This might seem like an attractive prospect because your home loan rate will be lower than the rates on other debts. But home loans last for decades. So while it might only add a little to your repayments each month, you could be stretching your debts out for years or decades.

This will cost you a lot more in interest.

Can I get a debt consolidation loan with bad credit?

If you're struggling to manage multiple debts then you may already have a bad credit score. But borrowers with bad credit can still get debt consolidation loans.

Here are some tips:

• Improve your credit score before applying. A small improvement to your credit score could make all the difference.
• Get a risk-based personal loan. Many lenders offer risk-based pricing, which just means lower rates for good credit borrowers and higher rates for borrowers with lower scores.
• Check eligibility requirements before applying. A rejected application harms your credit score, making it even harder to get your next loan approved. Lessen your chance of rejection by checking a lender's eligibility requirements before you apply.
• Look at specialist bad credit lenders. There are lenders that specialise in lending to borrowers with poor credit histories.

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Frequently asked questions about debt consolidation loans

• Is it harder to get a debt consolidation loan?

  Debt consolidation loans could be easy to get if you have things such as good credit, high income, security, and a history of saving and meeting bills on time. However things like having a poor credit score, low or inconsistent income, or a large borrowing amount, then you could have a harder time getting approved.

• Can I consolidate unsecured debt?

  Most lenders offer unsecured personal loans for debt consolidation. If you have multiple debts these are probably not secured (unless you have a car loan). The loan you use to consolidate the debts can be unsecured too.

• How long does it take to get approved for a debt consolidation loan?

  A debt consolidation loan can be approved in a day, however it will depend on the size and complexity of your debts - as well as your credit history.

  Specialised debt consolidation services can take a bit longer, as they will look at your finances and find a tailored solution to your situation. This could make the application process take longer, as the solution may involve things such as negotiating with your current lenders.

• Can I consolidate more than one credit card?

  You can roll multiple credit card debts into one personal loan. Or alternatively, you can combine multiple cards into a single balance transfer credit card with an interest-free period.

• Which banks offer debt consolidation loans?

  Most Australian banks, including Commbank, Westpac, NAB and ANZ offer unsecured personal loans you can use for debt consolidation. Interest rates on these loans vary based on your credit score.

  While these banks may not advertise specialised debt consolidation loans, it will be a legitimate loan use reason under "any worthwhile purchase".

• Can I apply for a debt consolidation personal loan if I'm on Centrelink?

  Some lenders may classify Centrelink as income you can use to pay off your loan. It's important to find out if your lender accepts Centrelink recipients first.

  If you're on JobSeeker or Youth Allowance, you might need to speak to your creditors to work out a repayment plan.

• What's the difference between debt consolidation loans and a debt agreement?

  Debt consolidation means using a new loan to pay off multiple existing debts. A debt agreement is a new arrangement with an existing lender that lets you avoid bankruptcy while paying off all or part of your debts.

  According to the Australian Financial Security Authority a debt agreement is "a legally binding agreement between you and your creditors."

  You can only enter into a debt agreement via a registered debt agreement administrator.