How To Choose A Debt Consolidation Loan & Avoid Paying Too Much

Don’t pay more than you need to in personal loan interest rates for debt consolidation.

Aussies suffering with a summer holiday debt hangover are turning to personal loans in a bid to get their finances back on track. At the start of every new year in January and February, lenders see a spike in loan applications to consolidate debt.

But borrowers must be wary of potential traps that could see them repaying more than they have to in interest on a debt consolidation loan.

Aussies stressed about debt

A recent survey of almost 8,000 adults by Canstar Blue found that loan repayments were the biggest financial concern for 13% of respondents. The cost of electricity (29%) was the greatest cause of financial stress, ahead of healthcare and medical payments (16%).

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There is a significant difference between the lowest and highest rates on offer for variable and fixed rate unsecured personal loans. It could be tempting for households to tally up their holiday debt, panic, and take out a personal loan without doing their homework.

They could end up paying out a lot more than they need to that way, and if you’re looking to consolidate debt, the last thing you would want to do is commit to paying even more in your monthly repayments. It’s important to shop around for the best rates and features on offer.

What to look for in a debt consolidation loan

When considering a personal loan, think carefully about a loan term that would best suit you and your purpose. Cut the term short and you may find yourself struggling to find that larger amount of money each month that you will require in order to meet your repayment. On the other hand, if you spread the loan over too long a term, you’ll pay more interest overall.

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Interest rates should also be a determining factor in your decision making. The difference between the highest and lowest interest rates on our database for an unsecured personal loan is currently an incredible 16.71%. That’s a huge difference! On a $10,000 loan over 5 years, that difference in interest rates equates to around $2,422 extra in total interest paid over the life of the loan.

Want to compare loans with different interest rates? Use our Personal Loans Calculator to work out how different personal loan interest rates would affect your monthly repayments and the total interest you would pay overall:

Personal Loans Repayment Calculator

The following table shows the minimum, average, and maximum, interest rates currently on CANSTAR’s database for personal loans:

 

Secured Loans

Unsecured Loans

Car Loans

Minimum

4.53%

6.28%

4.61%

Average

9.40%

12.73%

10.30%

Maximum

19.49%

22.99%

21.99%

Source: www.canstar.com.au Rates current as at 1 November 2016.

How to avoid paying too much for a debt consolidation loan

1) Stick to the amount you want to borrow, and resist up-selling if your lender says you’ve been approved to borrow a higher amount. The added interest is better off in your pocket.

2) Don’t be dazzled by the low amount you will pay each month. Application fees and ongoing fees will bump that up.

3) Beware of introductory offers, which may start with a low interest rate but then switch or “revert” to a higher interest rate after a period of time (the revert rate). Much like the introductory offers for credit cards and home loans, a lower interest rate is only helpful if it is followed by an equally competitive revert rate. Ensure the rate you pay throughout the life of the loan is competitive.

4) Treat gimmicks such as cashback or prizes with care. They can mask higher overall charges.

5) Ensure there is no early repayment penalty, and that you have the ability to pay lump sums without a penalty fee. According to our data, the average early repayment fee was a little over $34 in 2015.

6) It goes without saying to warn against missing a payment. We’re all human and slip up occasionally, but missing a payment on a loan is a serious black mark on your credit rating and credit report. Paying a little extra each month will give you a buffer against a missed payment penalty.

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