A debt consolidation personal loan can help reduce your interest rate and fees by combining your existing loans and debts into one. Avoid the stress of dealing with multiple rates and fees, so you can focus on paying off your debt more quickly.
In 2014, the Australian Bureau of Statistics (ABS) commissioned a study titled Australian Social Trends, 2014. The study examined various forms of household debt using data from the ABS National Accounts and the ABS Survey of Income and Housing.
The study revealed interesting trends of how Australians handle their debts.
Why do people struggle with debt?
A look at the numbers above reveals that debt is a part of the majority of Australian households. While some of us continue to struggle with debt, others manage their debts with complete assurance. A different approach and a different mindset make a big difference when it comes to dealing with debt responsibly. How do you deal with your debt? People who struggle with debt typically do the following:
Do not monitor their income and expenses – this may be due to not knowing how to budget properly or not sticking to their budget
Have expenses that typically exceed their income
Are experiencing financial distress brought on by conditions such as a reduced income, being underemployed, etc.
Engage in certain wasteful habits, such as shopping for things they don't need
Lack proper money management skills
Have little or no savings for dealing with unforeseen expenses such as medical emergencies or loss of income
Don't compare products or review their financial products to see if they could save
Remain in denial and refuse to acknowledge that they have a debt-related problem on their hands
Fail to pinpoint the real reasons that got them into debt in the first place
Make only the minimum payments towards their debts
Steps to consolidating your debt with a personal loan
Once you have decided to consolidate your debt, you will need to do the following:
Calculate how much you need to borrow to cover your debts. This should include any fees or charges you will have to cover in order to pay off your existing debts early.
Use the funds to pay off your other debts, along with any fees or charges.
Continue to make repayments on your personal loan until it has been repaid.
If you want to consolidate your debt using another method, such as using a credit card, you can read our comprehensive guide to debt consolidation.
But I have bad credit, can I still consolidate my debt?
Bad credit can strike at any time. Whether you lose your job or miss a few repayments due to illness, debt consolidation for bad credit borrowers is still possible. If you find that your repayments are spiralling out of control, debt consolidation could be for you. With the help of our guide, you could potentially get your finances back on track.
An unsecured personal loan that comes with a tailored rate based on you credit history.
What to consider when consolidating debt with a personal loan
Affordability. You should confirm that the personal loan you use will be cheaper to pay off than your existing debts. You must also ensure that you will be able to cover the repayments on your new loan to avoid going into further debt.
Early repayment costs. Many loans will require you to pay additional fees or charges if you repay the loan early. These will need to be paid if you wish to consolidate your debts under a new loan and should be included in your calculations to ensure debt consolidation is the right choice for you.
Legitimacy. Always make sure to check that the lender you wish to use is ASIC-licensed and legally able to operate in Australia.
What are the pros and cons of debt consolidation loans?
Simple, single repayment.
You can reduce your overall payments and costs.
No more phone calls from debt collectors.
You may increase your debt if you fail to make repayments.
You will need to pay any fees or charges for breaking your existing loans.
What other debt consolidation methods are available?
Debt consolidation loans are not the only type of credit available to you if you're struggling with debt. Find the debt consolidation method that is going to work best for your needs and the type of debt you have:
Balance transfer credit cards. If you have credit card debt across multiple accounts, you can consolidate it into a single card with a balance transfer. You will pay 0% interest for a specific period of time, with some card providers offering up to 24 months. Certain credit card providers also let you balance transfer personal loan debt. For this method, you will also need good credit to be approved.
Part 9 Debt Agreements. If you're having trouble paying your debt, you could enter into a debt agreement with a third-party organisation and your creditors. The agreement essentially freezes the interest you're paying and gives you a certain repayment period to pay back what you owe. Some creditors agree to accept less than the full balance for repaying your debt, but entering into a debt agreement shouldn't be taken lightly as it is considered a form of bankruptcy.
Credit counselling. Enlist the services of a reputed credit counselling organisation for formulating a Debt Management Plan (DMP). Once you enrol in a DMP, the creditors will often reduce your interest rates. Afterwards, you will need to make one monthly payment to the counselling organisation. This organisation will handle the repayment to your creditors. This is worthwhile if you can repay your debt within five years, but again, it isn't a decision that should be taken lightly. This should only be entered into if you are having difficulty repaying your debts on your own.
Staying out of debt
When it comes to staying out of debt, there are quite a few things you can do. You could look at developing an emergency fund by trying to save up to 15% of your income. If you find this number a bit high, or just want a way to ease the financial strain, you could consider ways to create alternate sources of income. There are a number of ways to make money online with freelance work by charging people for your skills. You could also consider selling some of your unused items or looking at your expenses and seeing ways you could cut back. As always, creating a budget and sticking to it is a sure-fire way to keep you on track.
Debt reduction strategies you can consider
If you are considering tackling your debt head-on without taking out a debt consolidation loan or other type of credit, there are ways to help you take back control of your finances:
The "snowball" or "domino" method.
This involves you writing down your total outstanding debt on each of your credit accounts, except for your mortgage and HECS-HELP debt. You don't need to consider interest rates at this point. Whichever account has the smallest balance is the account you make additional payments into and you pay off first – then the next smallest balance, then the next smallest, and so on until you are out of debt. This method helps get more accounts closed quickly, saving you interest and fees and gets you motivated by paying off debt. If two accounts have similar rates, pay off the higher interest rate account first. Remember to keep paying the minimum balance on all accounts and to consider early repayment fees for your personal loans.
Pay off your highest balances first
Another strategy is to pay your highest interest balances first. Paying off these accounts will save you money on interest repayments and have the same benefit as the "snowball" strategy in that it will help get your accounts closed. Start by writing down all your accounts, the balance outstanding on each and the interest rate. Remember to consider the balance of credit accounts when starting to pay them down and to keep making minimum repayments on all accounts.
Developing and sticking to a budget is of paramount importance when it comes to getting out of debt. There are a number of budgeting websites and tools available that can track your spending, saving and expenses, so see which one works for you.
There are some definite advantages to applying with your current bank as it may be more willing to approve you because it has an existing relationship with you and can see all your incomings and outgoings. Then again, it may not be able to offer you the best deal. You may want to compare your options before you apply to see how competitive its products are. Then, talk to your bank before applying to discuss your eligibility.
If you have more than one credit card from different brands, you might find it hard to manage your interest repayments. By rolling your existing debts into a new consolidation loan, you could pay less interest and lower your repayments. If you have one credit card with a $6,400 limit at 19.99% p.a., another $1,000 limit at 13.49% p.a. and an "interest-free" store card, these can all be consolidated into a new loan.
A debt consolidation loan is just a standard personal loan product that allows you to consolidate your current debts into one. A debt agreement is something usually taken out by people with large debts and even bad credit history and is a form of bankruptcy. Make sure you find out the terms of the loan you're entering into and the effect it will have on your credit file.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over six years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth's passion is writing about innovations in financial services (which has surprised her more than anyone else).
The best way to pay down $50,000 in debtDebt can creep up on you, so what do you do when it hits $50,000? We talk to financial experts Noel Whittaker and Robert Dawson about the best strategies to pay down substantial debt.
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