How to use a loan to consolidate your debts
Aussies have a lot of debt - around $32 billion worth on our collective credit cards.
And having more than one debt to pay off isn't uncommon - but it can be overwhelming, particularly if all your repayments tend to be due at once.
If you're finding it difficult to manage your debt repayments, you could consider a tactic called debt consolidation.
What's debt consolidation?
Imagine you're paying off two existing debts, maybe two credit cards, or a credit card and a loan. The existing debts have different interest rates or fees, which makes it harder to keep track of what's due when, and ultimately, manage your cash flow.
Debt consolidation is the process of consolidating - or combining - all your debts into one, and making repayments towards a single debt rather than multiple.
How does debt consolidation work?
One way debt consolidation works is by taking out a personal loan, and using the funds from the personal loan to repay your outstanding debts.
Once your debts are paid off, you'll only need to make repayments on the personal loan. Having all your debt in the same place could help you manage your repayments better.
It also means you're paying one interest rate, and one set of fees and charges.
If you're a homeowner, you can also roll your debts into your mortgage so that your debts are gradually paid off with your regular mortgage repayments.
What are the benefits of debt consolidation?
A key benefit of consolidating multiple debts into a single debt is that you'll have the opportunity to lower your overall interest rate. Credit cards have interest rates of up to 20% p.a, while personal loans can be much lower -- starting as low at 6% p.a.
That means you could be saving yourself hundreds - if not thousands - in the long run.
Another big benefit to debt consolidation is that you're only making one regular repayment to one lender. You also know how long you've got to pay the debt off. This means you know exactly how much you need to repay and when, which could make managing your household budget a lot easier. It also means you're dealing with less paperwork, apps and ultimately, stress!
What should I consider when consolidating my debts?
Debt consolidation could be a great option if you're struggling to juggle multiple debt repayments, and falling behind.
But it's not a silver bullet, and ultimately, you'll still need to be able to pay back your debts.
If you do opt for a personal loan and you find you can't keep up with the monthly repayments, this could significantly damage your credit score - or put you into financial hardship. It's important to remember that your credit score can impact your chances of your approval and your interest rate when applying for a loan.
It's also key to remember that rolling your debts into a loan could stretch out the timeframe you have to repay them, which means you'll be in debt for longer.
Does debt consolidation impact my credit score?
Getting a quote for a personal loan won't impact your credit. For example, with SocietyOne, you can get a free quote showing you the interest rate you qualify for, so you can make an informed assessment on whether debt consolidation is right for you.
If you decide to pursue the quote and make an application for a personal loan, it will have an immediate effect on your credit score. This is because it shows up as an application for credit. If you fail to pay off your personal loan (or any type of loan), or fail to make your repayments on time, this will also negatively impact your credit score again.
But, if you show you've successfully paid off your debts, and remained on top of your repayments to your personal loan, it will show the banks that you're a responsible borrower.
This will boost your credit score in the long run.
How do I apply for a personal loan?
The first step to applying for a personal loan is doing your homework.
Who has the best rates? Who can offer you the repayment schedule you need? What terms and conditions work for you?
Don't limit yourself to the big banks. Use comparison sites to determine which lender can offer you the loan that's right for you.
You can make an online application for personal loans with lenders like us here at SocietyOne.
Here, you can decide how much you want to borrow, and pay it back over a length of time you choose. You won't be charged monthly or early repayment fees, and we offer really competitive rates.
To apply for a loan with us, you'll need to satisfy some eligibility criteria, like:
- You need to be at least 21 years of age
- You must be an Australian citizen or a permanent resident of Australia
- You must earn more than $30,000 per annum (with Centrelink considered to be a supplementary form of income)
- You must have a good credit score.
On that last point, it's a good idea to check your credit score before you apply. Knowledge is power, and being aware of your credit health means there are no surprises when you make an application for finance.
Lenders don't rely solely on your credit score to determine if your application will be approved or rejected. They'll also look at your income, employment history and current employment status, too.
You can check your credit score for free at SocietyOne! It's simple, quick and you'll have access to a raft of features and benefits that will help you gain control of your finances.
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