Debt consolidation is for when you have multiple debts, whether it be personal loans, credit cards or something else, and you want to reduce the interest you're paying. This guide will take you through your options to consolidate your debts – including options for if you have bad credit.
First, how does debt consolidation work?
Debt consolidation involves you taking out another credit account (loan, credit card or other) that combines your existing credit accounts into one. This helps to reduce the separate fees and interest you are paying. The debt consolidation product you take out may involve extending a credit account 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.
What are your current monthly repayments? To make sure the debt consolidation product you're applying for is helping you to pay less, not more, across your debts, you need to know how much you're paying. Pull up all of your bank statements or all of your separate bills for your credit accounts and see how much you pay each month.
How much interest are you paying (and fees)? One benefit of debt consolidation is reducing what you're paying in interest and fees. Check your interest rates and fees for each of your accounts to ensure your new debt consolidation loan will be less.
Will you be eligible? While there are a few benefits to debt consolidation loans, there is no certainty as to your eligibility. There is also no certainty as to whether you'll be approved for the full amount you need to cover your debts. Check the minimum eligibility criteria, your credit file and the minimum and maximum allowable limits for the debt consolidation product you want. If in doubt, ask the provider directly.
Will an exit fee or penalty apply to any of your current credit accounts? Some personal loans may charge you a penalty to repay your loan early. If a fee does apply to your loan, you need to ensure you're still able to save with debt consolidation when you have to pay this fee.
What is your credit like? Credit providers go through your credit file and can check your credit score to assess your risk and establish your capacity to repay credit. You can get a copy of your credit file for free. Order it and make sure the information is correct and that you have a good idea of your financial position.
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.
What happens if a provider rejects your application?
If you are rejected then you should wait to apply again. Generally, if waiting between three and six months to apply with another provider will not be as risky as applying straight away. If you have series concerns about your debt you have Part 9 Debt Agreements (a form of bankruptcy) as a last resort.
In the event that a provider rejects your application for credit, bear in mind that not all is lost. But 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 report to ensure you are in a good financial position. If you're concerned about your application you could also work on reducing your debt for a period of time so you don't have to apply for as much. and then work on reducing debt by working on a budget.
Now, let's find the right debt consolidation option for you
The best way to consolidate your debt will depend on a number of factors, including how much debt you have and your financial situation. It also depends on the type of debt you're trying to consolidate. The sections below will guide you through consolidating debt based on your debt type.
What type of debt do you want to consolidate (pick one)?
If you have personal loan debt and are looking to consolidate or refinance this debt in order to save interest and better manage your repayments, you have a few options available to you.
Debt consolidation personal loan. This is one of the most common ways people choose to consolidate/refinance their personal loan debt. It simply involves taking out a new personal loan with a lower interest rate and fees than your current one and transferring your debt across. You'll need to ensure the personal loan allows debt consolidation and that it will allow you to borrow what you need.
Balance transfer credit card. Currently, two credit card providers (Virgin Money and Citi) allow you to balance transfer personal loan debt. This allows you to take out a new credit card with a limit higher than your personal loan debt and transfer your debt onto the card. You'll then pay a promotional 0% p.a. rate for a limited period of time on the debt, after which a standard rate (usually above 20% p.a.) will apply. You should work out whether you can repay your debt within the promotional period before applying.
Refinancing through your mortgage. If you have a mortgage you also have the option of consolidating your debt to repay it with this loan. However, keep in mind that while this option can seem cheaper due to the low rates home loans can offer, the loan terms can be up to 30 years. This can offset any savings earnt because of the rate, so make sure you sit down and do the maths before taking this option.
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.
Credit card debt can get out of control quickly, especially as it's quite common for us to have two or more credit cards. If you want to take back control of your credit card debt you have a few options available.
Balance transfer credit card. This is one of the most common methods of consolidating credit card debt. It involves you applying for a balance transfer credit card and transferring your existing card debt to that card. The debt you roll over will have a promotional rate (usually 0% p.a.) applied to it for a limited period of anywhere between three months to two years. After that time a revert rate (usually 20% p.a. or higher) will apply. It's up to you to make repayments to pay off your debt within the promotional period and avoid this revert rate.
Debt consolidation personal loan. If you don't mind paying interest in exchange for a regular payment structure and longer payment terms, then a debt consolidation personal loan may be an option to consider. This involves you applying for a lump sum to cover your credit card debt and then using the funds to pay your card's balance off. By making regular repayments on the personal loan for the term you have selected you will pay off your debt.
How to consolidate personal loan and credit card debt
If you have a range of debt you want to consolidate, such as personal loan and credit cards, you should first work out how much you're paying across your accounts. You also need to ensure you can exit your accounts without paying fees. Once you've done your due diligence you have a few options to consider.
Debt consolidation personal loan. This type of loan allows you to borrow a lump sum which you can then use to pay off your credit accounts, credit card and personal loan or otherwise. As long as you apply and are approved for a sufficient amount, you can pay off whichever debts you choose. Just ensure the personal loan you're applying for allows for debt consolidation.
Balance transfer credit card. Currently, two providers (Virgin Money and Citi) allow you to balance transfer debts from credit cards, personal loans and lines of credit. As long as you are approved for a high enough credit limit you can transfer debts from multiple accounts and take advantage of the promotional balance transfer rate on offer, which is usually 0% p.a. This rate can apply for as long as 24 months, after which a revert rate as high as 22% p.a. will apply to any unpaid balance.
Mortgage refinancing. Those with home loans can also consider consolidating their debt into their existing mortgage. However, ensure your home loan lender will allow you to do this and calculate if this will actually save you money when the payments are spread out over your home loan term.
While your options are much more limited when you have bad credit, debt consolidation is still possible. When entering into bad credit debt consolidation, however, you need to consider the level of debt you have and how much you're struggling with it. That's because bad credit debt consolidation may involve entering into a Part 9 Debt Agreement, which is a form of bankruptcy. However, there are other options available, it just may involve a higher interest rate being applied to your loan to offset the risk you represent as a bad credit borrower.
Part 9 Debt Agreement. A Part 9 Debt Agreement is an agreement between you, the lender and your creditors to pay a certain sum of money to your creditors. Once all parties agree, your debts will stop accruing interest, any civil actions are frozen and creditors can't pursue you. Keep in mind this agreement may result in you losing secured assets and you will have trouble accessing credit while you're repaying the amounts as per the agreement.
Bad credit debt consolidation loan. This is an unsecured debt consolidation loan that is available to bad credit borrowers. It allows you to consolidate your debts, including credit cards and personal loans, and may allow you to save interest and fees. Keep in mind a higher interest rate will apply than with good credit debt consolidation loans as you represent more of a risk.
Fox Symes can help you take back control of large debts by consolidating what you owe.
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Reducing your repayments
A range of debt consolidation options
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.
Not understanding what you're entering into. Make sure you ask questions of the provider before you take out a debt consolidation loan. What may be called a "debt consolidation solution" is actually a Part 9 Debt Agreement and involves you entering into a form of bankruptcy.
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 you can do 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.
The questions you've asked us about debt consolidation
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.
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.
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.
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 number 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 since there are lenders who will approve you if you have an adverse credit history.
If your level of debt is beyond the point of being unmanageable 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.
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 serious contracts to consider 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.
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 on 1800 007 007.
There are free credit and debt services available in every state and they can help you decide your best course of action.
You'll receive a fixed rate between 10.69% p.a. and 18.69% p.a. ( 11.58% p.a. to 19.53% p.a. comparison rate) based on your risk profile An unsecured loan up to $55,000 you can use for a range of purposes and pay off over up to 7 years. Note: Majority of customers will get the headline rate of 12.69% p.a. (13.56% p.a. comparison rate) or less. See Comparison rate warning in (i) above.
You'll receive a fixed rate between 8.95% p.a. and 16.95% p.a. based on your risk profile A loan from $5,000 to use for a range of purposes. Make additional repayments or pay off the loan early, penalty-free.
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