What are debt consolidation loans?
Debt consolidation or refinancing is a way of taking multiple debts and consolidating them into a single loan, subject to a single interest rate generally with a single monthly repayment. Instead of having to manage repayments to multiple banks and financial institutions, it allows you to deal with a single lender. Most consolidation loans should offer you a lower interest rate than you are receiving on your credit cards and personal loans. This reduced rate could ultimately save you thousands in interest for the loan.
Generally, you can consolidate your credit card debts, personal loans, store cards, payday loans, tax debt and any other debts.
What types of loans are available?
It will come in the form of either an unsecured personal loan or through refinancing your home loan and combining your unsecured debts into your mortgage.
Will I get approved if I have bad credit?
Eligibility is at the discretion of the bank or lender. Generally speaking, you are unlikely to be approved for a debt consolidation loan if you have a bad credit score. Lenders are also unlikely to accept your application if you have a history of late payments, multiple defaults or are unemployed or not in regular employment. So if you fit one or more of the above criteria or your debt situation has gotten out of control, you are unlikely to be eligible.
When should I consider consolidating debts?
Several situations should warrant consideration before consolidating your debts.
- Are you struggling to make monthly payments because your debts are to close to your credit card limits?
- Do you have defaults on your credit report? Those with defaults on their credit report may have a more difficult time qualifying for some types of loans
- Do you have an available credit card limit with a low-interest rate? If you do, a balance transfer of higher interest rate credit cards or other debts onto the card will consolidate them into one payment each month.
- Do you have equity in your home? If you have equity, you may be able to borrow against the value of the home with a low-interest-rate secured loan. These funds can then be used to pay down all of your credit card debts, personal loans or other debts you may have.
What should I do before I apply?
As with any significant financial commitment, you should research the market before you apply for debt consolidation. Compare the interest rates and term lengths offered by different banks and institutions to see if it will help improve your financial situation.
It is worth obtaining your credit score and a copy of your credit report to judge your likelihood of being approved for the loan.
How will it affect my credit score?
Generally, it will not immediately affect your credit score but should have a positive effect in the long run if you maintain a good repayment history. It should also make it easier to avoid payment defaults, which do harm your credit score. You should also bear in mind that applying for multiple loans and being rejected will have a negative effect. So you should only apply for credit if you are relatively confident of receiving approval for the loan.
What are the drawbacks?
Some people find themselves in a worse position than they were in before because debt consolidation does not help change the behaviour that got them into debt trouble. After consolidating their debts and clearing up credit card balances, many people end up maxing out their credit cards and slipping back into the same bad spending habits as before. It can lead to a situation that you have to repay the same amount of debt as well as the new loan.
Without discipline and a change in spending and saving habits, it is not going to provide a long term solution. Ultimately it should be used in conjunction with better financial habits if it is going to be truly useful and helpful in becoming debt-free.
What is the best way to get out of debt?
This question depends on your situation. If your debt problems and your repayments remain manageable, the best option is always budgeting and smarter management of your finances.
Consolidating your debts is most appropriate when your situation has not gotten entirely out of control but is just starting to become unmanageable. But you should only apply when you are ready to commit to changing your spending behaviour. If you are unsure, you should seek professional advice.
You should look for these benefits in any option you consider.
- Does it lower the interest rate you are paying?
- Does it help you pay off your debts faster?
- Does it help you stay organised, so you do not have to pay over the limit and late fees?
- Does it offer you a fixed rate?
- Can you qualify for this type of loan?
If you have been rejected for a loan to consolidate debt and your debts have become unmanageable, there are alternatives for you to consider. An increasingly common option is entering into a debt agreement with your creditors. In more extreme cases declaring bankruptcy might be the only option available to you. Bankruptcy is a last resort and has serious consequences.
What is the difference between a consolidation loan and a debt agreement?
They both allow you to combine your debt into a single repayment plan; however, there are crucial differences between the two.
Debt consolidation allows you to pay out your existing debts and instead repay a single loan with a single monthly repayment.
Debt agreement, on the other hand, is a legally binding agreement between you and your creditors to repay your debts. However, your debts are not paid out upfront. Instead, your creditors receive dividend payments based upon your debt agreement contributions.
Once you have completed the agreement, you are debt-free. It is only possible to enter into a debt agreement if you can not afford to pay your debts as and when they fall due.
I have equity in my home. Is it better for me to refinance my mortgage and consolidate debts?
If you have equity in your property and are looking to consolidate your debts, refinancing your mortgage might be the best option for you. Many lenders allow you to consolidate your debts into your home loan through refinancing.
The advantage of home loan refinancing is that you will generally be able to receive a much better interest rate than on an unsecured personal loan. However, you should be cautious as your debts will become combined with your mortgage. As with any mortgage, failure to repay the loan could result in the property being repossessed. You should also make sure you look into the fees in the refinancing contract as these may be significant and wind up costing you more in the long run.
Why Choose Fox Symes?
Fox Symes is the largest provider of debt solutions to individuals in Australia. Fox Symes helps over 100,000 Australians each year to resolve their debt and take financial control.
Fox Symes has been featured on both A Current Affair and Today Tonight.
Fox Symes can offer you a range of debt solutions which may help you
- Consolidate your debts into one affordable monthly repayment
- Lower your interest rates
- Reduce your monthly repayments
- Save thousands in interest
If you are in debt and want to know more about the solutions available to you contact us on 1300 098 127.
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