What you need to know to pay off your debt (even if you have bad credit)
Debt consolidation is the process of rolling all your outstanding debts into one loan, with the ultimate goal of paying off your debts at a lower rate. Consolidating loans works for some people and doesn’t for others — it depends entirely on your financial situation.
People with bad credit can also consolidate debt to get back in control of their finances and pay back their debts. To find out if a debt consolidation loan is right for you, read our guide below.
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DISCLAIMER: This information is provided as is and does not take into account your current financial situation. You should always seek professional financial advice before applying for any form of finance.
"How do I consolidate my debts?"
If you have debts that you want to consolidate, there are a few simple steps you can take to get back in control of your finances.
- Step 1 - Your debt and situation. What debt do you need to consolidate? Do you have bad credit? These will affect your options.
- Step 2 - Compare your options. See what loan options you have available to you and compare the fees and rates.
- Step 3 - Apply online. Make sure you're eligible and then submit your application online.
Questions you should ask before consolidating your debt
People turn to debt consolidation at various stages of debt. There are different ways of going about consolidating debt, meaning that you can turn to debt consolidation in a few scenarios and still make it work for you. So, if you're in debt, consider the following:
- Are you finding it difficult to meet your monthly repayments?
If so, you might find rolling your debts into one can reduce the amount you pay each month and make your debt easier to manage.
- Do you have multiple debts that you are trying to manage?
Multiple debts mean multiple sets of interest and fees, and can make it hard to stay on top of. Debt consolidation can offer you an easy way to keep track of your debt and pay it down.
- Is your credit file free from negative listings and defaults?
If you have bad credit history, your loan options may be limited. You'll need to keep this in mind when comparing what's available to you.
- Do you have debts with high interest rates?
You may be able to consolidate to a loan with a lower rate.
- Do you have equity in your home?
You might be able to use this equity to pay down your debts.
"The best time to consolidate your debt is basically whenever you are ready,"
says Chrish Samuel, Senior Finance Consultant at Finstar Financial. "There is no set limit that you must surpass before consolidating your debt; it’s really a matter of the sooner the better. However, when considering whether or not to consolidate your debts you should ask yourself the following questions: Am I finding it difficult to meet my monthly obligations? Are the interest rates so high that I am unable to keep up with reducing the principal amount of the loan? Do I currently have multiple unsecured lines of debt (like credit and store cards)? If you answer yes to any of the above questions, then consolidating your debt may be an appropriate course of action."Back to top
Compare the debt consolidation offers that could be available to you to come to an informed decision.
Can you afford the debt you're applying for?
If you're considering applying for a debt consolidation loan, you need to think about the effect it will have on your financial situation. Will it help you manage your repayments or force your debts to spiral out of control? Anyone thinking about applying for credit should take the following into account:
- What is the actual purpose of the loan?
Differentiating between needs and wants is crucial when applying for credit, because just ‘wanting’ something doesn’t mean you should borrow money to get it. Also, think carefully when a loan involves a friend or a family member where you have to act as a guarantor, because with such loans, you become liable in case of defaults or non-payment. If you’re applying for credit to pay utility bills, consider discussing financial hardship options with your provider first.
- Is borrowing your best bet?
Debt may not be the best option for you in various situations. How about you consider saving and then buying an item outright, or paying it off gradually by putting it on layby? Individuals on low incomes can even qualify for low interest or no interest loans. The No Interest Loans Scheme (NILS), for example, offers up to $1,200 to individuals on low incomes, provided they have Centrelink health care or pension cards, or qualify for one.
- What is your credit report like?
Credit providers go through your credit file to assess risk and establish your capacity to repay credit. You can get a copy of your credit file for free, and once you do you should go through it to check for mistakes.
- Can you make the repayments?
Before applying for a loan, establish if making repayments will be manageable on your existing budget. If you think you can reduce your monthly expenditure, try doing it for a couple of months before you actually seek credit. Don’t forget to take into account interest rate increases as well as unexpected expenses or changes in your circumstances.
- Is this a good time to get into more debt?
If you don’t have a stable job, if you’re planning to take time off to study or to start a family, or if you have health problems that might lead to reduced income, applying for credit might not be such a good idea.
Chrish Samuel, Senior Finance Consultant
If you have the luxury of being able to consolidate the debt into a home loan whilst incurring minimal additional costs to your existing monthly repayment this could be a good thing. However, it is important to remember not to continue the cycle of debt again. Whilst consolidation of debts into a home loan/ personal loan is seen as a quick fix, this is often not the case. The hardest aspect of minimising the debt in your life using debt consolidation is changing one’s mindset to move away from the financial hardship of yesteryear.
I am a firm supporter of cutting up credit cards and living life on a cash-only diet. Just like buying more groceries when shopping whilst hungry, statistics have shown that consumers tend to spend more on their credit cards than if they had cash. By shopping with cash rather than card, this will help to reduce impulse buying which is one of the largest reasons for consumer debt in Australia.
Whilst debt has a serious negative connotation associated with it we should not fear it. Structured/good debt is a tool that should be utilised by society to increase one’s wealth. However, to ensure that you are doing this correctly and in accordance to your specific financial needs it’s a good idea to speak to an adviser who can help by assessing your current financial position to ensure that you benefit from debt consolidation in both the short and long term.
How does debt consolidation work?
The world runs on credit, and as you go through life you might find yourself taking on more and more loans. It might start with a credit card or a car loan or you might even take out a small personal loan for a holiday. Eventually you may apply for a home loan to purchase your first home, and soon you're juggling repayments on a few different credit accounts. When you calculate the interest and fees on all the separate accounts you might find that you are paying a large amount, but there is a way to reduce it.
Debt consolidation involves you taking out another loan that combines your credit accounts into one and helps to reduce the separate fees and interest you are paying. The debt consolidation loan you take out may be borrowing on top of a loan you already hold, such as your mortgage. It's important to determine whether you can afford the repayments on a debt consolidation loan before you apply and if taking one out will put you in a better financial position rather than a worse one.
Options you have to reduce your debt
Depending on your financial situation, there are a few options available to you when it comes to debt consolidation. Take a look at the options below and see which one you would be eligible for, and which one would work best for your situation.
A debt consolidation personal loan is an unsecured line of credit that lets you bring all your debts into one. The aim with this type of debt consolidation option is to reduce the amount you pay in interest and fees, so ensure that the amount you're being charged on the new loan is lower than what you're currently paying.
- Good and bad credit borrowers. There are lenders who offer loans to borrowers with adverse credit histories, as well as loan options for those reserved with good credit histories. Check which loans are available to you.
- Loan terms. Depending on the loan you opt for, loan terms can be as short as 16 days or as long as seven years. Find a loan option that best meets your needs and gives you ample time to pay back your debt. You might also be able to take advantage of flexible repayment features such as being able to make additional repayments or having access to a redraw facility.
- What debts can you consolidate? It's really up to you — bring over debts from other personal loans, credit, store or charge cards or other lines of credit. The lender might have guidelines as to what debts you can bring over, so check what is specified in your loan.
Home equity loan
If you have equity in your home you can choose to refinance your mortgage to repay some of your debts. This is a slightly more complicated option as it involves a larger asset — your home — so to ensure the refinancing option you pick will help you to save in the long run.
- Good and bad credit borrowers. Again, borrowers with both good and bad credit history can apply for a refinancing consolidation loan. Obviously, you need to have an existing loan to apply.
- What you need to consider before you apply. Refinancing your home loan can be a costly exercise, so consider all the applicable fees and charges before you apply. You also need to keep in mind that your current debts will take a lot longer to pay off — standard home loans can last 25 to 30 years, so think about the interest you'd pay over that time.
- What debts can you consolidate? Bring across debt from your credit cards, personal loans, car loans and personal overdrafts.
Credit card balance transfer
If you have more than one credit card with an outstanding balance, you can consider a balance transfer to pay down your debt. By applying for a balance transfer credit card you can pay a low or no interest rate on your transferred balance for a specified amount of time.
- Good credit borrowers. If you have negative credit history you will not be eligible for a balance transfer credit card. Bad credit borrowers will need to consider one of the previous two options.
- What debts can you consolidate? Most balance transfer credit cards only let you bring over debts from other credit store and charge cards. There's also usually a limit of how many cards you can consolidate and up to what level of your credit limit you can take up with your debt. Some card providers, however, will let you bring over debt from personal loans, overdrafts and other lines of personal credit.
- Should you balance transfer? Look at how much debt you currently have and think about the likelihood of you being approved for a high enough credit limit to transfer all of it to your new card. Also, would you be able to pay off the debt before the balance transfer promotional period was over? If not, the revert rate, which is usually the cash advance rate, will apply.
Refinancing through sickness
John was in his mid-thirties working full time in an office. He was receiving a salary which allowed him to easily meet his day to day expenses, which included his mortgage repayments, his car loans and the minimum repayments on his credit cards.
Unfortunately John was struck by a sudden illness which forced him to take six months off from work for treatment and recovery. During these six months he had no income coming in, and John and his wife Claire were forced to pay for their living expenses using their credit cards. John also couldn't meet his loan obligations and defaulted on his mortgage and both his car loans.
As a result John's finances looked like this:
- Mortgage: $202,000 with a $1,500 monthly repayment.
- Credit card balance: $22,000 with a $660 monthly repayment. This card was in default, but John had a debt agreement in place to pay just $10,000 of the owed amount, to close the account.
- First car loan: $13,000 with a $390 monthly repayment. John was three months behind on his payments to this loan.
- Second car loan: $29,000 with a $900 monthly repayment. This loan was also three months in arrears.
What did John do?
At this point the bank was ready to foreclose on John's home and both his car loans leaving his with nothing, and nowhere to live. The credit card company was willing to take just $10,000 to settle the debt, and this meant John's total loan debt was $254,000 with current monthly repayments of $3,500. His house was valued at $330,000.
Once John had recovered his health he realised that he was in too deep to recover from his financial situation. He was too far behind on his car loans, and coupled with interest charges and penalties the obligations were just too much. John applied for loans with a number of lenders but was refused, so was still looking at losing everything.
Instead, John worked with a debt consolidation company to refinance all of his debts into one personal loan facility. The loan would total $254,000 and his monthly repayment would be just $2,438, reducing the family's outgoing repayments by almost $1,000 a month. At the same time, the creditors were not pursuing their money and the pressure eased. A debt consolidation loan saved John and Claire's home, cars and lifestyle, and he has learnt a valuable lesson about living from paycheck to paycheck — they're no longer worried about not having a banner year, no matter what might come to pass.
The good and the bad of consolidating debt
- Reduce the amount you pay in the long term. When you have several separate credit accounts that you're paying interest and fees for, the costs for these accounts can quickly start to accumulate. By rolling your debts into one account you eliminate the separate fees you're paying and are also likely to reduce the amount you're paying in interest. Over the long term, the savings can add up exponentially.
- Better manage your repayments and credit accounts. Not only does having separate credit accounts cost you more, but having several different repayments is difficult to manage. A debt consolidation loan gives you one lender to deal with, one set of fees to keep in mind and one interest rate to remember.
- Stop the phone calls from your creditors. Are you worried every time you hear the phone ring? You can stop your creditors hassling you by getting your debt under control with consolidation.
- Avoid bankruptcy or serious bad credit listings on your file. If your debt is quickly spiralling out of control, a consolidation loan gives you a clear set path to paying it off. You might be able to avoid bankruptcy and you can avoid defaulting on your current debt by taking control.
What to be aware of
- Debt consolidation might not be the best way. Taking out a debt consolidation loan should only be done when you've decided it's the best option for you. Will you save money on interest and fees when you consolidate? Will this loan help you get in control of your debts? Or will this loan end up costing you more? Be sure to check out all the fees and charges before you apply for any loan.
- Disreputable lenders. Some lenders prey on bad credit borrowers and charge exceptionally high fees and rates for debt consolidation loans. Compare your loan options to other similar ones that are available to ensure what you're being charged is competitive.
- High fees and rates charged for bad credit borrowers. Generally, loans available to bad credit borrowers carry higher rates and fees. Because of this, bad credit borrowers need to be especially wary when taking out one of these loans. Ensure that a debt consolidation loan is the best option for you before taking one on.
Debt collectors: What you need to know
Even though you have bad debts, you also still have rights. There are laws that control what debt collectors can and cannot do.
- They cannot excessively harass, threaten, or bully you and collectors are supposed to only contact you only during certain hours of the day. There are strict rules governing face to face encounters as well. Keep a log of the dates and times you are contacted along with any other specifics. This will come in handy if you end up having to file a complaint, which can be done by contacting a consumer protection agency such as the Australian Competition and Consumer Commission (ACCC).
- Check your bill records if collectors are calling you. Ask for a detailed statement of what they say you owe. If the debt involves a loan, ask for a copy of the paperwork. A collector must always identify himself and state the reason he is contacting you. He should be prepared to provide you with account information, and should offer a repayment or settlement plan.
- Figure out what you must spend to get by, such as food, shelter, car, utilities, etc. It is good practice to set up an appointment with a non-profit help debt counsellor before making any promises or commitments to a collector.
- Certain credit brokers and credit providers in Australia operate illegally without licenses, so make sure you’re dealing with a licensed individual or organisation. To check, you can go through ASIC Connect's Professional Registers or call ASIC's infoline.
What happens if a provider rejects my application?
In the event that a provider rejects your application for credit, bear in mind that not all is lost. Before you apply for credit there are a few things you can do to improve your chances of being approved. For example, you can start by going through your credit file, and then work on reducing debt by working on a budget.
Remember that there’s no guarantees when it comes to applying for loans, so it is best that you assess your financial situation and take suitable remedial measures before applying. You can strengthen your application by asking a relative or a friend to be a guarantor, but this can be risky for the individual in question. You can also, as mentioned previously, apply for a low interest or no interest loan if you qualify.
The bottom line remains that you should play smart when it comes to debt, and not end up with more than you can repay, because the downhill spiral is anything but pleasant.
If you are rejected, then you should consider getting your finances under control. If you are still in need of a loan, you can always compare a range of loans that have no credit check
The questions you've asked us about debt consolidation
I want to apply for a debt consolidation loan. What are the most important things I need to consider?
As the reason you're opting for this loan is to get in control of your debt, the most important considerations are all to do with how much the loan will cost you. What is the rate of interest you will be charged? What fees do you have to pay at the onset of the loan and are there any ongoing fees? Check every single cost that is associated with the loan and ensure it is, first of all, competitive, and secondly that you will be saving money when you consolidate.
My current bank offers debt consolidation loans. Should I just apply with them?
Applying with your current bank has some advantages, but you should still compare the options available to you before you apply. If you have a few negative listings on your credit file and have a strong past relationship with your bank, you may have a better chance of being approved with them than with another lender. This is, of course, if your account has been kept in good standing. As mentioned, it still helps to compare the options you may be eligible for so you're aware of the debt consolidation possibilities in the market.
Should I consolidate my debt into my home loan to save having to take out another loan?
As we've outlined above, if you have equity in your home you can consider adding your debt to your home loan by refinancing. There are a few considerations before doing this. First off, while the interest rate might be lower, remember that the debt will likely be spread out over a much longer period as home loans are for longer terms than standard personal loans. The costs of refinancing should also factor into your decision. By doing some simple calculations when comparing your options you can find out which one will be the most financially viable. You should think about whether this type of consolidation will be the best way for you to manage your debt.
Do I need to change my budget and spending when I consolidate my debt?
If you are taking out a traditional debt consolidation loan then you are not required to alter your budget, although this can help you get out of debt sooner. A debt consolidation loan can see a reduction in the amount you pay in interest, which in turn reduces your monthly repayments. If you have no fees for making extra repayments, you could put the money you save towards your loan to help pay down your debt more quickly. You might also want to review your current budget and see if there's any ongoing expenditure you can cut back on so you can put more towards your loan. This being said, if you choose to enter a debt agreement there may be budget and spending restrictions depending on the nature of your agreement.
I have bad credit — what are my debt consolidation options?
Many people looking to consolidate their debt are also in the bad credit boat. While your options are more limited, it's important to note that there is still a range of options available to you. Depending on the level of debt you're in and how you think you'll manage a loan and repayments, a debt consolidation loan might be one to consider. There are lenders who specialise in bad credit debt consolidation loans. You can also look at consolidating the debt into your home loan if you have equity in your home, and again, there are lenders who will approve you if you have adverse credit history. If your level of debt is beyond the point of being able to be managed with a loan, you might want to consider a debt agreement. As outlined above, a debt agreement is an act of bankruptcy and should only be considered as a last resort.
What's the different between a debt consolidation loan and a debt agreement?
A debt consolidation loan is a type of personal loan that allows you to combine your current debts, such as loans and credit cards, into one. These loans can help reduce the amount you're paying in interest and fees and also make your debt easier to manage with one simple repayment. A debt agreement, on the other hand, is a binding agreement that is an actual act of bankruptcy. It will be listed on your credit file and affect your ability to access credit later on. Debt agreements are a serious thing to enter into and the decision shouldn't be taken lightly. They are usually entered into when you find your debt unmanageable but don't want to enter into bankruptcy — you will agree to pay your debtors a certain amount of money that you can afford.
I am anxious about my debt and don't know what to do. Who can I talk to?
Debt anxiety is a common concern, especially if you're finding your debt overwhelming or unmanageable. If you're unsure whether a debt consolidation loan is right for you, or you want some advice on your personal situation, you can get in contact with a free financial counsellor. There are free credit and debt services available in every state and they can help you decide your best course of action.