What is a debt consolidation personal loan?
A debt consolidation loan is a type of personal loan designed to, as the name suggests, consolidate and manage multiple debts by bringing them under one singular payment. Personal loans are designed to be versatile in nature, meaning you’ll be able to use them to cover just about any debt you need.
Most people decide to take out a debt consolidation loan to make their various debt payments easier to organise and manage, with one payment essentially covering all of them rather than several repayments on different days across the month and at different frequencies. They’re especially useful if you have one or more high-interest debts, such as a high outstanding credit card balance, as paying them off with a personal loan can help you save money.
In most cases, these loans are unsecured, meaning you won’t be required to put forward any assets as collateral to back up the finance agreement. What this means is that these loans don’t put you at any level of risk of losing a valuable item such as your car if you end up struggling to cover your loan payments.
How does a debt consolidation personal loan works?
First and foremost, you’ll need to calculate what your total outstanding debts are to ensure you’re borrowing enough to cover them. Once you have this figure, you can apply for a personal loan matching that amount and, if approved, pay out all of those debts to your respective debtors. In their eyes, your debts have been repaid, meaning you won’t be at risk of any further pursuit of funds from them. With your loan taken out, you’ll only be required to make one payment per week, fortnight or month, rather than several.
It's important to have a clear grasp of how consolidating your debts can save you money both from month to month and overall across your term. Take the following example:
Rose is looking to consolidate her several outstanding debts into one payment. At the moment, she owes $10,000 on a four-year personal loan at 9.5% p.a., $7,500 on another personal loan over three years at 11% p.a. and two credit card debts: $5,000 at 18.5% p.a. and $2,500 at 20% p.a.
If she made the minimum repayments on these debts each month, she’d be paying around $650 per month and just under $50,000 overall. However, if she combined these debts into one $25,000 personal loan over five years at 9.5% p.a., she would only pay $525 per month and $31,502.79 in total.
*Please note that this calculation assumes minimum credit card repayments. Paying above the minimum each month is highly recommended to reduce the cost of your debt.
How should I compare debt consolidation loans?
There are many ways borrowers should look to compare different loan offers on the market. Because there are so many available today, it pays to be thorough throughout this process, as even the tiniest of differences could save you a significant amount of money overall. That’s why it’s important to compare with Savvy. We’re partnered with reputable lenders from around the country to help provide you with the highest quality comparisons so you can find yourself in the best position to confidently choose the right loan for your needs. The factors to compare include the following:
Interest rates are perhaps the most important aspect of personal loans to get right, as they’re the most significant influence on their overall cost. They’re very simple to compare, as most lenders position them very clearly on their loan offer pages. You should always aim to lock in the lowest possible rate to save you money overall. For instance, a $30,000 personal loan over five years at 8% p.a. would cost you just under $6,500 in interest. However, even picking a rate of 7% p.a. would reduce your interest bill by over $850.
Not every lender will offer the same potential borrowing range on their loans. While they generally range from as little as $2,000 to $75,000 unsecured, some financiers will impose higher minimums of $5,000 or more, while many cap their loans at a maximum of $50,000. While it may not affect you if you’re looking at a $20,000 personal loan, for instance, it’s certainly worth considering if you want to borrow at the higher or lower end of the scale.
The same applies to the potential term lengths on offer; some lenders won’t offer the full range of one to seven years. Many will raise the minimum term to either two or three years, which can potentially lock you in for longer and force you to pay more in interest and fees as a result. On the other end of the scale, seven isn’t always the magic number, with financiers offering loans with repayment periods up to a maximum of five years.
In addition to interest, fees form an important part of the personal loan comparison process. You should strive to lock in a deal which will cost you less overall, as even small fees can mount up over time and set you back a significant amount. The main charges to consider when comparing different loan offers are:
- Ongoing/monthly service fees: $0 to $10
- Establishment fee: $0 to $595
- Early repayment fee: depends on loan value and time remaining
- Late payment fees: $15 to $35
It’s important to also consider some of the key features which are included on different personal loans also. Perhaps the most important of these is repayment flexibility, or more specifically the ability to pay out your loan ahead of schedule without being charged a fee for doing so. Contributing above the minimum each month will reduce your outstanding debt at a faster rate and cut down on the interest and fees you’re liable to pay as a result. Other features include redraw facilities (which enable to withdraw these additional payments) and being able to choose between weekly, fortnightly or monthly payments.
There’s little point in spending time submitting an application for a loan if you aren’t actually eligible to be approved for it. That’s why it’s crucial to compare each lender’s criteria so you can be sure you’ll be able to qualify before you apply. Although different lenders will enforce different criteria, there are some basic points which are likely to apply across the board. These include:
- You must be at least 18 years of age
- You must be an Australian citizen or permanent resident (or an eligible visa holder in some cases)
- You must be employed and working on a consistent basis
- You must be earning a stable income (usually of at least $20,000 per year or more)
- You must have a positive credit history
- You mustn’t have any defaults, bankruptcies, Part 9 debt agreements or court judgments on your file
Types of personal loan
With an unsecured personal loan, you can potentially borrow as much as $75,000 without the need to attach any valuable assets, such as your car, as security. These loans are the most widely available and often the quickest, with same-day approval possible.
Secured personal loans, on the other hand, make use of collateral. This lowers your risk profile in the eyes of a lender, potentially lowering your interest rate and expanding your borrowing power beyond what you may be able to get through an unsecured loan.
Variable interest rates remain open to fluctuation during your term. This means you can benefit from decreasing rates and save on your loan if the market heads in that direction, although you’ll also pay more if rates start rising.
Fixed interest rates are locked at the beginning of your loan and remain constant throughout your repayments. This acts as a valuable protection against interest rate increases, as your loan will be unaffected, but you’ll miss out on potential drops as well.
If you’re paying off multiple debts at the moment, particularly those with high interest (such as credit card debts), consolidating them into one payment can not only make them more convenient to manage but also potentially save you money overall.
Looking to take off on a holiday with your family but want to pay it off at your own speed? Travelling can be expensive, so you can distribute the cost of your next trip over a period you’re more comfortable with by taking out a personal loan to pay for it.
There are so many costs that go into making your dream wedding a reality, from venue hire to catering to dresses and suits and so much more. By taking out a personal loan, you can start planning the big day you want, even if you can’t pay for it upfront.
Home improvements are desirable for a range of homeowners to help keep their living space fresh and interesting, not to mention increase its value. You can get past the financial hit of renovations with a personal loan paid in instalments.
Personal loans aren’t limited to PAYG employees, though. If you’re running your own business, you can still be approved for financing by submitting tax returns and other alternative documents instead of payslips and utilise your funds however you wish.
There’s a variety of expenses which come with being a student, ranging from the cost of your courses, textbooks and computer to your accommodation. Taking out a personal loan can make these costs more manageable by spacing them out.
Some lenders offer green personal loans, which are designed to be used for energy-efficient appliances and products such as solar panel and air conditioning installation in your home. You can qualify for lower interest rates and fees with this loan.
Why compare personal loans through Savvy?
How to apply for a debt consolidation loan
Tally up your current debts
First and foremost, it’s crucial that you take stock of your debts to work out whether a personal loan is right for you. This will give you a clear understanding of the amount that you’ll require to pay off all of your outstanding debts.
It’s also worthwhile running rudimentary calculations to determine your potential savings when consolidating with a personal loan. For instance, if you have different types of finance such as a personal loan and multiple credit card debts, you may stand to save depending on the size of the latter debts and their interest rates.
The pros and cons of a debt consolidation personal loan
Making your debts more manageable
By condensing all of your debts into one payment, you won’t have to worry about remembering to pay multiple debtors on differing schedules each month.
Saving money overall
If you’re using your loan to consolidate several high-interest debts, such as credit cards, you can secure a personal loan at a lower rate and save a significant amount overall.
No assets connected to your debt
There isn’t any need for you to attach your vehicle, home equity or savings as collateral for your finance deal, keeping your assets separate from the loan deal in case your situation changes.
Stretching out short-term debts
The flip side of paying off smaller debts in this manner is that, in many cases, you’d pay them off at a slower rate than you otherwise would’ve, which could actually cost you more overall.
Potentially higher interest rates
While personal loans tend to come with lower rates than credit cards, they may not offer lower interest than what you might have on an outstanding car loan, for instance.
Possible charges for paying out other loans
In some cases, you may be required to pay a fee as a means of releasing yourself from your existing loan contract early, which could cost you up to hundreds of dollars.
Frequently asked questions about debt consolidation
Helpful personal loan guides
Still looking for the right personal loan?
Personal loans come in all shapes and sizes, so read more about the ways you can use them, as well as how they might work for you.