Debt Consolidation Loans

Many people leave debt consolidation to the last minute, by which time their finances have often become worse. This can affect their credit rating and make it harder to consolidate debts at the standard interest rate. While it would be nice if your money challenges came right by themselves, this seldom happens. But debt consolidation isn’t necessarily the first thing you should do. Here are some things it often helps to do first:

• Avoid getting behind, or further behind, in your current repayments if you possibly can. If you’re facing a temporary money problem and may not be able to meet your upcoming repayments, talk to the lender as soon as possible. 
• A lender may be able to adjust your repayment plan to help see you through, because they don’t want you to get behind either. 
• It pays to get rid of any card, loan or buy-now-pay-later accounts that could make it easy for you to borrow more. 
• Finally, it always pays to get independent advice from a financial adviser or budgeting service, especially when you’re struggling to get your finances sorted.

One of the things people like most about a consolidation loan is the weight it lifts off their shoulders. It doesn’t make your overall debt go away, but when it’s combined with a realistic budget and some helpful money management advice, it does bring peace of mind and a clear path to being debt-free. Here’s how:

• Instead of multiple debts with different repayments and due dates, you just have one. 
• The regular repayments for your new loan can be timed to match your weekly, fortnightly or monthly pay day. 
• The repayment amounts can usually be adjusted to suit your situation by altering the time it will take to repay the loan in full. 
• Worrying about late payment fees and further damage to your credit rating becomes a thing of the past.

When you apply for a consolidation loan, the lender will need to know about all of your debts, including the ones you don’t plan to consolidate. It’s al lpart of working out how much you can afford to repay. If it’s not possible to consolidate one of the debts that you wanted to, they’ll let you know.

In the meantime, here are some of the debts that typically can’t be consolidated:

• Tax payments
• Loans from the government, such as an MSD loan
• Housing loans, such as a mortgage or First Home Loan
• Debts arising from a lawsuit
• Secured loans, unless the security can be released when its repaid by the consolidation loan provider

As you can see, most kinds of debt can usually be consolidated. This includes everything from credit cards and buy-now-pay-later loans, to dentist bills and overdue rent. The main thing is to ask sooner rather than later, so things don’t get worse.

Everyone’s situation is different, but there’s one thing most will have in common – the longer you wait to ask about a consolidation loan, the more difficult it usually becomes to get one. That’s because most people’s debts just get worse while they’re hoping things will somehow fix themselves.

The more your debts build up and the more payments you miss, the more risk you bring to a consolidation loan provider. But they’re not there to judge, they just to help if they reasonably can. There’s no point in them giving you a loan that you can’t afford and there may be better options they can suggest. This might include helping you prepare an uncomfortable-but-realistic budget to start building a lower-risk financial history and get things back on track. It’s amazing the difference that just having a reliable plan can make to how you feel.

If you’ve missed paying bills, credit cards or loans in the past, you may have a poor credit score. This is something that all utility, phone and credit organisations can look at before signing you up. You can check your own score online through one of the authorised credit score and credit report providers.

However, a poor credit score doesn’t necessarily mean you can’t get a consolidation loan. It just means you appear to have a higher risk of not paying on time, depending on your financial history. Lenders often manage this risk by charging a higher interest rate, at least until you’ve had a year or so to prove you’re now better at managing repayments. But no responsible lender will sign you up to a consolidation loan with an interest rate they think you can’t afford. They may be able to suggest alternative ways to reduce their risk, and therefore the interest rate, such as using something you own as security for the loan or having a guarantor – that’s someone who legally guarantees to meet the repayments if you can’t.

The short answer is ‘yes it is’, but usually in a good way. Consolidation loans simplify your debts into one loan with a fixed interest rate and, ideally, a sensible repayment plan. These benefits help you to avoid missed payments that can harm your credit score. Consolidation loans also provide a clear sign that you’ve taken control of your finances in a responsible and effective way. As you continue making regular on-time repayments, your credit score can only improve.

A consolidation loan is designed to repay your multiple debts, leaving you with just one loan to manage. The lender will have calculated your ability to repay their loan on that basis. To help ensure this happens, most lenders will repay your debts directly on your behalf. They’ll just ask you for the other lenders’ account details and how much is owed in each case. 

If you have used an asset as security with another lender, and that asset will become security for your consolidation loan, your new lender will definitely need to repay that loan directly on your behalf. This is to make sure the existing security over the asset is released.

If part of your consolidation loan agreement includes a cash payment to help see you through, the lender will transfer that amount to your bank account.

Consolidation loans are designed to help you get back on track as soon as possible, not stay in debt forever.  Depending on your circumstances, the time to repay it in full (the term) can be anything from six months to five years, or sometimes even longer.

A longer term will reduce your regular repayment amounts, but you’ll end up paying interest for longer, so the total cost of the loan will be higher. On the other hand, trying to repay your loan too quickly can put you right back where you started – stressed and damaging your credit score further. So choosing the best term for your situation is about finding a sensible and manageable balance between realistic repayments and the total cost of the loan over its term.

Most consolidation loans have a fixed interest rate for the life of the loan. This makes it easy to plan ahead and budget with confidence. However, unlike fixed interest rate home loans, consolidation loans can usually be paid off early without attracting an early repayment penalty.

If you get a wage increase or receive a lump sum from something like an inheritance, it pays to get independent financial advice before deciding what to do. Paying off your consolidation loan may or may not be the best option. Depending on your circumstances, it might be better to first build an emergency fund, for example. Then if things continue to go well, you can look at repaying your consolidation loan faster or in full before it’s due.