Debt consolidation loans Australia

What is a debt consolidation loan?

A debt consolidation loan combines some or all of your existing debts (including any credit card debt and debts from other loan products you have) into one personal loan, which you may use to pay off your other lenders and then repay over time. The aim is generally to make it easier to manage your repayments. If you take out a personal loan with a lower interest rate and fees than what you’re paying on your existing products, this could also help to reduce your overall debt.

There are pros and cons to taking on a debt consolidation loan. A debt consolidation loan can have several possible benefits, such as:

• You only have to make one regular repayment, which may make your debt easier to manage.
• You may be able to save on interest charges by getting a personal loan with a lower interest rate than your existing debts.
• Personal loans are repaid over a fixed term, so you have a clear timeline for when you can be debt-free (provided you make your repayments and pay any additional fees on time). This is compared to credit cards where interest can accumulate over a long timeframe because providers don’t generally impose hard deadlines for repaying the full debt.

However, if the loan is more expensive than your existing debts, then you could end up accumulating more debt through interest and fees. It’s important to compare the interest rate and fees of any new loan you’re considering against your current debts. According to regulator ASIC’s Moneysmart website, the fees you are charged could include upfront and ongoing fees for the new loan, as well as penalties for paying off your old loans early.

You should also look at the term of the new loan and work out how much you would end up paying over the life of the loan. Generally, the longer the term, the lower your regular repayments would be, but the more you would pay in total.

If you are finding it difficult to manage your credit card repayments or other debt, you can also contact your lender or credit card provider to see what your options are, which Moneysmart suggests doing before you apply for a debt consolidation loan or pay a company to help you consolidate your debts. You might also want to seek advice from a financial counsellor. Financial counsellors offer free, independent and confidential advice. You can speak to one through the National Debt Helpline on 1800 007 007.

It’s a good idea to compare debt consolidation loans before committing to one, because the cost can vary significantly depending on the provider. For any loan you’re considering, take note of the interest rate (including whether it is fixed or variable), the fees (which could include application fees, monthly fees and missed payment fees, for example), the loan term (typically from one to five years on a personal loan) and the features available (like the ability to make extra repayments without paying a fee). You can use the table at the top of this page to compare different types of loans.

Eligibility and the interest rate you are offered may be subject to your credit score and other financial circumstances. For example, some lenders offer better interest rates to borrowers with good credit scores. If your score is not as high as you would like, there are steps you can take to help improve it.

Keep in mind that a lender could decide not to approve your application if it thinks your credit score is too low or if you don’t meet its other eligibility criteria. Before applying, you should also confirm with the provider whether the loan can be used for debt consolidation purposes.

It’s important to make sure you can afford the new repayments on the debt consolidation loan. If you can, you may be able to save a significant amount in interest and fees.

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A debt consolidation loan itself generally shouldn’t affect your credit score any more than any other type of personal loan. That said, when you apply for credit – including a credit card or any type of personal loan – it is noted on your credit report as a credit enquiry. If you make multiple applications in a short period of time, this could negatively impact your credit score, making it difficult for you to obtain credit in the future.

Additionally, if you don’t meet your repayments on the loan, this will generally be recorded on your credit report and may lower your credit score. In contrast, if you make your repayments on time and demonstrate a good repayment history, this would also be noted on your report and could actually improve your credit score.

Therefore, you should carefully consider your financial position before applying for this type of loan, as well as checking to ensure the loan as a whole suits your needs.

→ You can check your credit score for free with Canstar

If you are finding it hard to manage your debts, you can contact a financial counsellor for help. Call the National Debt Helpline on 1800 007 007 to speak to a counsellor for free.