You’ve made the decision to take control of your finances with a debt consolidation loan.
So how exactly do you get one, and what do you need to organise to make it happen?
By working through these steps, you’ll be well-placed to choose and apply for the right debt consolidation loan for you.
1. Gather information about your debts
Firstly, you’ll need to work out how much debt you have, plus additional information about your various debts. Gather your contracts, statements, and/or terms and conditions to note down the following for each debt you have:
- What type of debt is it (for example, secured/unsecured personal loan, credit card or outstanding utility balances)?
- How much do you owe?
- What is the interest rate?
- What are the monthly fees?
- Are there any break costs (for contracts such as a loan)?
2. Work out how much you can afford to pay
In order to choose the right consolidation loan, it’s good to understand how much you can reasonably afford to pay each month. The easiest way to determine this is to create a budget of your income and expenses, using a budget planner such as the one on moneysmart.gov.au.
3. Explore your options
Now that you have a clear picture of your finances – what you owe, and how much you can repay each month – you can assess your debt relief options. Using a debt consolidation calculator will help you choose the best debt solution.
There are a few ways you can consolidate debt:
Debt consolidation loan: A personal loan can be a good option to merge a range of debts. With this option, you have a fixed term set, which means that repayments are calculated so that your debt is cleared at the end of the loan period. By choosing a debt consolidation loan, you may save money by eliminating multiple fees and lower your interest rate.
Mortgage refinancing: If you already have a mortgage, applying for a home loan top-up can be a simple and effective way to consolidate your debt. By choosing this option, you may potentially have a lower interest rate than with other lending options such as a personal loan. Yin addition, you may reduce the total monthly repayment across all your debts. However, it’s important to be aware that by choosing to refinance your mortgage, you will either have higher mortgage repayments than previously, or your loan term will increase, which means incurring more interest over the long term.
Credit card balance transfer: If your debts are all credit card based, this is generally the best option. By transferring multiple balances to one low interest rate card, you can potentially gain an introductory interest free period, eliminate multiple card fees by cancelling the other cards, and simplify your banking with only one statement and repayment. The biggest consideration with choosing a balance transfer is that you need to exercise good discipline, as credit cards don’t have a set repayment amount. You should set a plan to pay off the entire balance during the interest free period, and then commit to paying your balance in full each month.
4. Get your documents together
When you apply for a debt solution, you will need to provide personal and financial information to the lender, so that they can assess whether you are likely to be able to repay your loan. It’s best to gather your documentation, including identification, plus statements for each of your debts.
5. Contact providers
Now it’s time to compare different debt solutions providers to find the best consolidation loan product for your needs. If you’re finding it confusing, you can seek free financial advice.
6. Choose a solution and apply
Once you’ve made a decision, you can submit an application and be on your way to debt relief. Keep in mind that making multiple credit applications can have a negative effect on your credit rating, so it’s important to choose which product is best for you before applying.
