Debt consolidation loans

Do you have multiple debts that you find difficult to manage, particularly if there is some high-interest debt in the mix? A debt consolidation loan could be the answer in your situation, and you can compare your options here.

By   |   Verified by David Boyd   |   Updated 30th October 2020

Comparing debt consolidation loans for $30,000.00 over 60 months

ANZ Variable Rate Personal Loan

On ANZ's website

Apply by 02 December 2020Last clicked an hour ago

ANZ Variable Rate Personal Loan

Interest rate

12.99%

Comparison rate

13.86%

Repayment period

5 years

Application fee

$150.00

Monthly repayment

$685.85

Total repayment

$41,151.00

Highlights

  • For a limited time only, ANZ has reduced their variable interest rate to 12.99% p.a. (eligibility criteria and terms and conditions apply).
  • Get up to 7 years maximum repayment period.
  • Log on to ANZ Internet Banking to see your balance, repayments, interest paid, and details about your next payment.
SocietyOne Personal Loan: Good Credit Rating (5 Year Loan Term)

On SocietyOne's website

SocietyOne Personal Loan: Good Credit Rating (5 Year Loan Term)

Interest rate

From 13.49% (personalised)

Comparison rate

From 14.96% (personalised)

Repayment period

5 years

Application fee

From $395.00

Monthly repayment

$699.23

Total repayment

$41,953.80

Highlights

  • The application fee for Good Credit Rating (5 Year Loan Term) is from 4.5% of the loan amount (minimum of $395.00 up to $995.00).
  • Get a personalised interest rate of 13.49% p.a. to 14.99% p.a. (Comparison rate from 14.96% p.a. to 16.48% p.a.)
  • No monthly or early repayment fees.
ANZ Fixed Rate Personal Loan

On ANZ's website

Apply by 02 December 2020

ANZ Fixed Rate Personal Loan

Interest rate

10.50%

Comparison rate

11.38%

Repayment period

5 years

Application fee

$150.00

Monthly repayment

$648.04

Total repayment

$38,882.40

Highlights

  • For a limited time only, ANZ has reduced their fixed interest rate to 10.50% p.a. (eligibility criteria and terms and conditions apply).
  • Get up to 7 years maximum repayment period.
  • Log on to ANZ Internet Banking to see your balance, repayments, interest paid, and details about your next payment.
NAB Variable Rate Personal Loan

On NAB's website

NAB Variable Rate Personal Loan

Interest rate

From 9.99% (personalised)

Comparison rate

From 10.88% (personalised)

Repayment period

5 years

Application fee

$150.00

Monthly repayment

$640.45

Total repayment

$38,427.00

Highlights

  • Get a variable headline rate of 12.69% p.a.* (for new loans only). The interest rate you get may be different depending on your circumstance.
  • 13.56% p.a. variable comparison rate.
  • With redraw facility.
  • 1-7 years flexible loan term.
  • Borrow from $5,000 up to $55,000.

*The variable headline rate is what the majority of personal loan customers will get or lower.

NAB Fixed Rate Personal Loan

On NAB's website

NAB Fixed Rate Personal Loan

Interest rate

From 9.99% (personalised)

Comparison rate

From 10.88% (personalised)

Repayment period

5 years

Application fee

$150.00

Monthly repayment

$640.45

Total repayment

$38,427.00

Highlights

  • Get a fixed headline rate of 12.69% p.a.* (for new loans only). The interest rate you get may be different depending on your circumstance.
  • 13.56% p.a. fixed comparison rate.
  • 1-7 years flexible loan term.
  • Borrow from $5,000 up to $55,000.
  • Flexible weekly, fortnightly or monthly repayments.


*The fixed headline rate is what the majority of personal loan customers will get or lower.

Harmoney Unsecured Personal Loan (5 Year Loan Term)

On Harmoney's website

Harmoney Unsecured Personal Loan (5 Year Loan Term)

Interest rate

From 6.99% (personalised)

Comparison rate

From 7.79% (personalised)

Repayment period

5 years

Application fee

From $295.00

Monthly repayment

$599.73

Total repayment

$35,983.80

Highlights

  • Personal Loans up to $50,000
  • No early repayment fees
  • Apply online in minutes
MoneyMe Personal Loan - Excellent Credit Rating

On MoneyMe's website

MoneyMe Personal Loan - Excellent Credit Rating

Interest rate

From 8.99% (personalised)

Comparison rate

From 10.68% (personalised)

Repayment period

5 years

Application fee

From $200.00

Monthly repayment

$626.76

Total repayment

$37,605.60

Highlights

  • Easy application for up to $50,000 online, no paperwork required
  • MoneyMe's smart tech gives you an outcome on the spot
  • Funds hit your bank account in as little as minutes (transfer times may vary depending on your bank)
  • Flexible repayment options
  • No monthly charges, early exit fees or funky hidden costs

Overview

As a percentage of GDP, Australians have the second largest household debt amount in the developed world (AAP). And according to the ABC's Australia Talks National Survey, 37% of Australians are struggling to pay off their debts. Home loans, car loans, credit card debt – these can all pile up fast. Debt anxiety can push us to overwork ourselves, skimp on necessary purchases, and can contribute to general unhappiness.

But loans don't always have to be a bad thing. After all, loans can help us land our dream homes, secure a means of transport and save us in a bind when money is tight. It's when you take out more loans than you can manage that you start to feel overwhelmed, especially with all the interest rates and different repayment dates and amounts involved.

Fortunately, there are debt consolidation loans – a loan to pay out all your other loans and ease your financial anxieties by leaving you with only one loan to repay, ideally at a lower overall interest rate. If you're unsure about how taking another loan can solve your existing loan problems, read on for more information. In this quick primer, you’ll learn the basics of debt consolidation and find out if it's the right option for you.

Understanding debt consolidation

Debt consolidation is the act of combining multiple loans into a single loan plan. Instead of repaying several loans and credit cards with their own interest rates, late fees and early repayment penalties, taking out a loan for debt consolidation gives you just one loan amount, one interest rate, as well as one set of fees and charges to keep in mind.

So how does debt consolidation work? It's simple. You apply for a debt consolidation loan, borrow enough money to get all your existing debts repaid, and then work towards meeting the monthly repayments for your one new loan. Essentially, you use new debt to take care of your old debt.

Like your typical personal loan, a debt consolidation loan is usually unsecured, meaning your bank or lending party will not require you to assign an asset (such as a piece of property or a car) as collateral. However, some lenders do offer secured debt consolidation loans as well. And while a debt consolidation loan often has a longer term than a regular personal loan – the average is three to five years – the interest rate will likely be lower than the combined interest of all your existing loans.

Types of debt that can be consolidated

Most financiers allow borrowers to consolidate debts from unsecured loans, with some exemptions for certain types of secured debts. It's best to consult with a lender to find out their policies on secured and unsecured debts.

  • Credit card debt. Credit card debt is, by far, the most common type of debt. By transferring your credit card debt into a consolidated loan, you can avoid paying the high interest charges usually associated with credit cards. Paying off credit card debts sooner also helps boost your credit rating.
  • Home mortgage debt. Home loans are the second most common form of debt, and the largest contributor to our total household debt. While there aren't too many options to consolidate your home loan into a debt consolidation loan, there are some options to consolidate all personal loans into a home loan. Another way to do it is to refinance your existing mortgage.
  • Student loan debts. Whether you need to fund your university tuition, pay for equipment, or need an allowance for living expenses, student loans can help you stay focused on your education. The great thing about student loans is that they can be deferred for up to five years, so typically, you can start paying off your loans when you start making money. However, entry-level jobs don't pay very well, so sometimes student loans (and interest!) can pile up fast.
  • Other personal loans: Medical, home renovation, wedding, furniture, and car loans are just a few examples of personal loans that can be consolidated into one loan.

Secured vs unsecured loans

What exactly is a secured debt consolidation loan? And is it better than an unsecured loan? There is no right or wrong type of loan – it all depends on what you're looking for.

A secured loan for debt consolidation is a type of personal loan that lets borrowers roll all their debts into one account, as long as they can provide some kind of security against their loan. A "security" is an asset of yours that can be taken into possession by the lender should you be unable to meet the monthly loan repayment. Because the lender gets collateral they can offer a lower interest rate, since they have a little more assurance that their borrower will pay.

An unsecured loan, on the other hand, doesn't require collateral. While this may seem like a better deal than a secured loan, keep in mind that most lenders must impose a higher interest rate for an unsecured loan. This is to offset the risk involved in lending such a large sum of money. Additionally, most lenders will not offer unsecured loans to borrowers with low credit ratings.

Fixed vs variable interest rate

There are two types of interest rates: fixed and variable. A loan with a fixed interest rate is a loan where the amount of interest you have to pay for each periodical repayment remains the same throughout the duration of the loan term. Conversely, a loan with a variable interest rate is one where the amount of interest you're charged changes based on certain factors, such as a change in the Reserve Bank of Australia's cash rate. Rates on a variable interest loan can either increase or decrease over time.

Is either of these a better option? At first glance, a fixed rate seems like the better option – it's predictable and easy to plan for. However, some studies find that borrowers on a variable interest loan end up paying less in interest than those on a fixed rate.

How to qualify for a debt consolidation loan

While each lending body has its own set of qualifications and requirements, here are some things you can prepare before applying for a loan:

  • Proof of identity. To prove your identity online or otherwise, you typically need 100 points' worth of federal government or state-issued documents. A birth certificate, a current passport and a certificate of Australian citizenship will get you 70 points each, while an Australian driver's licence or tertiary student card rate 40 points each. Medicare cards and credit cards count for 25 points.
  • Proof of income. Your lender needs to be sure you're capable of repaying the loan amount by the end of the loan term. To do so, they'll likely ask for copies of your most recent payslips.
  • Proof of residence. Some lenders will require a billing statement, a mortgage agreement, or a rental contract that states your name and current address.
  • A good credit score. Some lenders have a minimum requirement on credit scores. Your credit score and the repayment history it represents provide lenders with a snapshot of your ability to handle your finances. Think of it as a report card of your financial activities. Repaying the appropriate amount owed on your existing debts without being late means your score should improve over time. If you do not know what is on your file, then take a few minutes to get your free credit report before applying.
  • An asset for security. If you're gunning for a secured loan, you'll need some kind of valuable asset that you can offer up as collateral. Cars and residences are often used as security.

Alternatives to a debt consolidation loan

Consider two other ways of consolidating your debts before you apply for a debt consolidation personal loan:

  • Credit card balance transfer. Many credit cards offer 0% interest for long periods on balances transferred when you apply for a new card. You can transfer balances from your existing credit cards – and in some cases from personal loans – to your new card, and benefit from a period of between six months and two years or more in which to get on top of your debt repayments without paying interest.
  • Refinancing your home. You may want to refinance your home to take advantage of a better interest rate offer, or to access the equity you have built up in your home. In this latter case, the current market value of your home is much higher than your current home loan balance, and you could refinance for a larger loan amount. This converts your home equity into extra cash able to be used for paying off other debts. Think carefully before you do this, however, because you're converting those short-term debts into one with a much longer term.

Learn about debt consolidation loans

Got questions about how to consolidate your debt? Our team share their top tips.

  • Pros & cons

  • Tips

  • FAQs

  • Glossary

You only have to manage one debt

No more forgetting to pay your bills, no more late fees, no more high interest rates. With a consolidated loan, you only have to think about one loan amount and one loan term. That way, paying off your debts doesn't become a confusing,  time-consuming and expensive affair.

You can lower your interest rate

When you consolidate your debts into one loan, you get to pay off all your existing debts and, in a way, start over with a fresh personal loan. Lenders offer consolidated loans at low interest rates. So more often than not, the monthly rate and comparison rate for your new debt consolidation loan will be lower than all your existing loans' interest rates combined.

You can improve your credit rating

When you're constantly late on your monthly or annual repayments, your credit rating could go on a nosedive. With only one loan to manage, you can stay on top of paying off your loan amount. With enough on-time repayments, you can build your credit to a decent rating.

You could lose your assets with a secured debt consolidation loan

When you consolidate all your debts into one secured account, you're putting a lot on the line – namely, your personal assets. If you default on a secured debt consolidation loan, your lender can and will take your security. Unfortunately, if your security is your home or your car, this can put you in even more financial trouble.

You could accumulate more debt

Consolidating your debts could potentially give you the illusion of financial stability. It's easy to think about accruing more debts or taking out more loans when it seems like you've only got one other loan to take care of.

You could end up lowering your credit score

A consolidated loan can improve your credit rating – but only if you're responsible enough to make your monthly repayments on time. A debt consolidation loan can be both much bigger and last much longer than a standard personal loan, and if you fail to meet your payments your credit rating could take a huge hit.

Research and organise

Getting a debt consolidation loan is a big financial decision. Don't jump headfirst without doing your research and organising your requirements. Here are four practical things you can do to prepare:

  • Know your credit history. Lenders will ask about your credit history. You don't want to come in looking like you don't know what's going on with your finances, and more importantly, you don't want to lie about them! Lenders are taking a big risk by shelling out their money for you. The least you can do is be as transparent as possible, because if you get caught out you'll seriously damage your chances of approval.
  • Organise all the information you have on your debts. Whether it's in a notebook or a Google Doc, it's always a good idea to have a file on hand that tells you everything there is to know about your existing debts. Note down the loan term, interest rate, comparison rate, early repayment policies, and other pertinent information for each of your loans. That way, you can refer to your document to calculate and compare what your debt consolidation loan lender has to offer.
  • Calculate your living expenses. Can you handle the loan term, interest rate, and comparison rate that your lender is offering? There's only one way to know, and it's to compute your living expenses and see how much money you can set aside to pay off your loan.
  • Compare debt consolidation loans. Check out our comparison table above to find the right deals to suit your lifestyle. Be thorough and take time to peruse each debt consolidation loan available online. Compare interest rate, comparison rate, loan term and monthly repayment methods so you can strike the best deal.

Watch out for deals that are "too good to be true"

You might be tempted to take on deals that promise you'll be debt-free in less than a year. Or maybe you'll find a financier who's willing to lend you money without even asking for the basic requirements such as your proof of income or your credit score. While these may sound like once-in-a-lifetime deals, it's best to be wary of anything that seems like too good an offer.

Before applying for a debt consolidation loan, do some background research on your lender. Check out their website and look for reviews online. If you come across anything shady, don't risk it. You can also check if the company is registered under ASIC Connect. If you don't find any information on them as either a Credit Registered Person, a Credit Representative or a Credit Licensee, they may be operating illegally. Finty lists only appropriately registered lenders.

Other red flags to watch out for are lenders who skirt the topic of repayments, are vague on the loan term, refuse or stall on providing you with a contract, and badger you to sign an agreement even though you're uncomfortable and have unanswered questions.

Know when debt consolidation isn't worth it

Although consolidation loans may work for some, it isn't a cure-all. For example, your income might not be enough to meet the monthly payment. Or your credit score is too low. Or you can't ensure that you'll be able to meet the fees for your new loan.

On the other hand, a consolidation loan may sometimes take more effort than just simple planning. For example, you have enough income to cover your current loans and their interest charges and fees, but you just don't know how to budget your money. Or your debt load is small enough to be payable within the next year. This is why it's important to organise all the information pertaining to your outstanding loans and calculate your current expenses.

Lower your credit limit

Consolidating your loans may not be enough to keep you on track to long-term financial stability. It can be the convenience of a credit card that makes it easy to go off track and once again start accruing more debts than you can manage. In some cases, the best financial decision may be to put a cap on your credit card usage to prevent falling into the same trap over and over again.

Whether this means reducing your credit limit or cancelling your card altogether is up to you.

Are there any drawbacks to a debt consolidation loan?

If you take out a debt consolidation loan you may be stretching out your repayment period into 3-5 years, which means that your total interest cost will be greater than if you paid off your debt within a shorter time frame. But a longer repayment period means that your monthly repayments will be lower and will more easily fit into your budget.

Your existing loans may have high break fees for early repayment if they have a fixed interest rate. Check the amounts of any likely early exit fees before you commit to a debt consolidation loan.

If you choose a secured loan (which usually has a lower interest rate) you risk losing the asset you offered as collateral if you default on the loan.

Also, you’ll probably need to exert more discipline over your financial habits and resist the temptation to spend more. Learn to avoid the problems that got you into debt in the first place, otherwise you may just end up deeper in debt.

How long is the loan term for a debt consolidation loan?

You will usually be able to choose your loan term. A typical term would be between three and five years, but loan terms of 1-7 years are usually available. Bear in mind that the longer the term, the more you will pay in interest overall, and the shorter the term, the higher your monthly repayments will be.

How much can I borrow via a debt consolidation loan?

This will depend on your credit score and your income, but a typical debt consolidation loan amount would be $10,000-$20,000.

How often will I need to make repayments on a debt consolidation loan?

Monthly repayments are the norm, but you may be able to choose weekly or fortnightly repayments. The more frequently you repay, the lower your overall interest cost will be.

How will a debt consolidation loan affect my credit rating?

First of all, the loan application will appear in your credit history file as an enquiry and then as an approval, both of which will have a slight downward impact on your credit score. But if you keep up with repayments, always paying the required amount on time, your credit score will recover, and will certainly end up being better than it was if you were unable to cope with the multiple debts you previously had.

On the other hand, if you don’t handle your debt consolidation loan responsibly, missing repayments, paying less than you should or paying late, you will damage your credit score even further.

What fees are associated with a debt consolidation loan?

You need to check for the following fees when comparing loans, since they will vary depending on the lender and the loan product:

  • Application fee, only payable if your loan is approved
  • Monthly or annual account-keeping or administration fee
  • Late payment fee, if you don’t make the required periodic repayment on time
  • Break fee, usually payable if you want to exit a fixed rate loan early

One way to compare these costs is to look at the comparison interest rate, which builds in the effect of unavoidable loan fees. But bear in mind that the comparison rate is only a guide, and odes not include the effect of every fee you could be faced with.

What is a debt consolidation loan?

It’s a type of personal loan used to convert a number of different loans an individual may have, into a single loan. The funds advanced by a lender for a new debt consolidation loan are used to repay the remaining principal and any early exit fees on the existing loans, so that only a single, manageable loan remains.

What kinds of debt consolidation loan are available?

As with most personal loans, there are four main loan features to consider:

  • Secured loan, where the lender takes a charge over an asset belonging to the lender (e.g. a car or a house) as security (collateral), usually offering a lower interest rate in return. But the lender could repossess your asset to recover the loan principal and costs if you default on the loan.
  • Unsecured loan, the most common type of debt consolidation loan, where the borrower offers no collateral, usually resulting in a higher interest rate and fees.
  • Fixed interest rate, meaning that the interest rate will not change during the life of the loan. This makes monthly repayments easier to budget for, but you will probably be unable to make extra repayments to clear your debt faster, and you could face high break fees if you do try to repay early.
  • Variable interest rate, which means that the rate could go up or down at any time. It makes planning your finances more difficult, especially if interest rates go up, but variable interest rates tend to be lower than fixed rates at the beginning of the loan. Variable rate loans are also generally more flexible regarding fees, extra repayments and early discharge of the loan.

Why should I consider a debt consolidation loan?

There are two main reasons.

You may have already have a number of personal loans and credit card debts (for a car, say, plus a student loan, a credit card debt and a store card debt) with different repayment dates and amounts that are a nuisance to manage. It can also be difficult to decide which debt to concentrate on repaying first. You could eliminate a lot of hassle and save on multiple annual fees and monthly account-keeping fees by converting them into a single loan.

But by far the most common reason for taking out a debt consolidation loan is to reduce your dependence on high-interest credit card debt and get your finances back on track. You could use the debt consolidation loan to pay off credit card debt and any other personal loans, and end up with an overall interest rate that is much lower than the one you were previously paying.

Borrower

A borrower is the person who takes out a loan from a lender. A borrower applies for a loan from a bank or a credit union to pay off a debt or finance a major expense such as a car, a home or a wedding.

Collateral

Also known as security, this is an asset such as a car or a home offered as a guarantee of payment by the borrower. It can be taken into possession by a lender if a borrower defaults on their loan repayments.

Comparison rate

The comparison interest rate represents a close estimate of the total cost of your loan, which involves more than just paying interest. On top of the interest rate, the comparison rate also covers things like monthly fees and upfront application fees.

Creditor

Creditor is another word for lender. Credit card companies, banks and other lending bodies are considered as creditors.

Credit score or rating

Your credit score is a number based on the information in your credit history file. It is determined by your financial behaviour, including existing unpaid debts and the frequency and timeliness (or otherwise) of your repayments. If you repay your loans on time, your credit score will be higher.

Creditworthiness

Your creditworthiness is determined by your credit score. The better your credit score, the higher your creditworthiness. Lenders decide on whether to approve a personal loan application (and how much interest to charge) based on creditworthiness.

Debt

Your debt is the money you owe to a lender, such as a personal loan, credit card balance or home loan.

Debt consolidation

Debt consolidation is the act of combining two or more loans into a new personal loan. When you consolidate your loans, you end up with one interest rate, one loan term, one set of fees and one regular repayment date.

Default

If you fail to make the required loan repayments for several successive weeks or months, you are in default.

Early repayment

An early repayment is when a borrower opts to pay out their personal loan before the date agreed in their loan's terms and conditions. Many lenders charge early repayment penalty fees because they have been deprived of some of the interest they expected to earn.

Fixed rate

A fixed interest rate is one that doesn't change throughout the loan term.

Loan term

The loan term is the agreed period at the conclusion of which you are meant to have repaid your loan in full.

Mortgage

A mortgage is a type of loan taken with the goal of owning a property's title once it is fully paid.

Personal loan

A personal loan is a type of loan that a borrower can take out to pay for something personal, such as a car, education, home refurbishing, or even holidays. A personal loan can either be unsecured or secured, though an unsecured personal loan is far more common.

Refinancing

Refinancing is somewhat similar to debt consolidation in that you replace an existing loan with a new one.

Repossession

Repossession is when a bank or a financier takes away an asset over which they have a charge, because the lender has failed to repay their personal loan on time.

Variable interest rate

As opposed to fixed interest, variable interest can change during the loan term. It can either go higher or lower, depending on certain factors.