How to consolidate debt - a complete guide
Are you having difficulties repaying debt? Debt consolidation can help you combine multiple debts into one, easy-to-manage loan.
Through this single regular payment, you can reduce the total amount that you have to pay towards debt. This reduces the strain on your budget and will lower your risk of defaulting.
How does debt consolidation work?
If you have multiple, unsecured debts that you're struggling to keep up with, debt consolidation could be the answer your looking for. It will allow you to take out a new, larger loan and repay all of these smaller debts. The new loan will come with a longer-term and, ideally a lower interest rate.
Your debt consolidation options
Debt Consolidation loans can be tailored to meet your needs precisely.
Balance transfer credit cards
One of the easiest ways to consolidate debt is to use a 0% interest credit card. By transferring the outstanding balances on all of your other cards to this one, you will automatically eliminate the interest payments. You will have to pay back only what you owe at the current moment. In order to use this debt consolidation strategy effectively, you need to plan things so that you can pay back the total outstanding amount before the 0% interest period ends.
Home equity loans
The other most widely used strategy involves taking out a debt consolidation loan secured with the equity which you have in your home. You can top up your existing home loan by transferring the balances from all of your unsecured debt accounts.
Alternatively, you can take out a new home equity loan and use it to repay your debt. In any case, you will pay lower interest rate compared to the rates on unsecured loans. This will make the regular payments smaller and more affordable. You will have more disposable income during the month. The major drawback of secured debt consolidation is that if you default on the loan, the lender may take over your house.
Debt consolidation loans
These loan products have been specifically designed for the purpose of debt consolidation. They are just like regular personal loans and come with a set loan term and a fixed interest rate.
We've compiled a step-by-step guide to Debt consolidation below;
If you are seriously struggling with repaying existing debt and you are getting into even more debt as time passes, you need to request professional assistance immediately. You should turn to a debt counsellor or a financial advisor specialising in debt management. The expert will analyse your current financial situation and come up with a strategy for resolving your debt problem. Typically, the strategy involves reducing your monthly payment obligation and repaying the accumulated debt effectively.
It's best if you shop around for a debt consolidation loan in order to find the most suitable solution for you. Once you find it, you need to apply without delay. Just make sure that the terms and conditions match your needs and requirements. You'll have the best chances to qualify if you have a stable employment income and good credit history.
You need to demonstrate to the lender that you have been paying all of your bills timely and in full. Following the responsible lending obligations, the lender will determine your eligibility based on your current monthly income and expenditure as well. It is best if you apply for just one consolidation loan. This is because the making of several applications can have a damaging effect on your credit score.
Bad credit debt consolidation loans
If you have bad credit, you may not be able to qualify for debt consolidation with all lenders. In this case, you need to apply for a bad credit loan from a lender who accepts loan applications with bad credit.
1) Do I qualify for debt consolidation?
In order to qualify for a debt consolidation loan, your income left after the payment of all of your monthly expenses must be higher than the projected monthly loan payment. This will ensure that the lender takes a lower risk. You have to have a good and preferably excellent credit history as well. If you have a bad credit record, your chances of approval will be quite low. Still, many lenders are willing to demonstrate flexibility and to approve applicants who have had one or two minor credit issues such as late payments in the past.
2) How to avoid common debt consolidation mistakes?
All loans for debt consolidation have closing costs which are paid at the time of closing the loan deal. They are typically calculated as a percentage of the loan amount. It is best if you can pay them out of your pocket. Lenders typically offer solutions to borrowers who cannot afford to cover thee costs, but these solutions always make the loans more expensive. If the costs are added to the loan amount, you will have to pay interest on them throughout the whole term of the loan. If they are eliminated at the expense of a higher interest rate, the total cost which you will incur in the end will be higher as well. Besides, the higher rate will make the regular payments bigger.
The purpose of debt consolidation is to provide financial relief and not to change the form of debt. If the new loan is not affordable to you because of a high interest rate or high fees, there is no point in getting it as it will not resolve your problem. You can search for another loan of this type. If this is the best available deal at the moment, you should attempt to negotiate better terms and conditions on the loan and more specifically lower interest rate, lower regular payments, and a more lenient repayment structure. Many lenders show flexibility especially when their business activity is low.
3) Getting assistance & support
Before you make an application for a debt consolidation loan, you have to calculate the total amount of outstanding debt which you currently have, the amount which you need to borrow, and the repayment of the new loan. Since the calculations are fairly complex and making the right decision involves analysis as well, you should consider using the services of a credit counsellor who is specialised in helping people in your situation.
The credit counsellor will propose the most effective debt consolidation solution for you and assist you with selecting the most affordable and most easily accessible consolidation loan for you. The professional will draw a precise plan for the repayment of the new loan so that you have more cash flow during the month.
Do I qualify for debt consolidation?
- Are you an Australian citizen or permanent resident?
- Are you employed full-time and earning a stable income?
- Are you over the age of 18?
Documents required to apply
- ID (passport or Medicare card)
- Proof of income in the form of payslips
- 3-months bank statements
- Proof of address in the form of a utility bill
- A list of all of your current debt
- For secured loans, details regarding the asset you'll be using as collateral