Debt Consolidation

Debt has become a fixture in the lives of many Australians, and you’ve all but resigned yourself to the fact that it will always be a fixture. Well it doesn’t have to be that way because there are a range of ways you can clear your debts, no matter how unmanageable they may seem.

Debt consolidation is just one of those ways and while rolling all of your personal loans, car loans and credit card debts into one loan, one repayment and a lower interest rate sounds appealing, it is not the right option for everyone facing personal debts. Debt consolidation can be dangerous if the underlying issues of your financial responsibility are not addressed and catered for in the consolidation.

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Featured Line of Credit Loans to Help Consolidate Debt

Home Loan	Details	Interest Rate (p.a.)	Comp Rate^ (p.a.)	App Fee / Ongoing Fee	Max LVR	Min & Max Borrowing
Loans.com.au – Dream Catcher​	Consolidated you debt with 5 free monthly ATM transactions and extra repayments anytime.	6.13%	6.47%	$0 / $375	80%	$50,000 / $750,000
Fox Symes Fixed Rate Home Loan – 3 Year Fixed Rate	Take advantage of this fixed rate home loan offer where your interest rate will remain fixed and unchanged for a period of 3 years	6.20%	6.40%	$Varies / $0	95%	$0 / $2,000,000
State Custodians Mortgage Company Line Of Credit Loan	A feature packed loan at a price you can afford.	6.22%	6.45%	$0 / $345	90%	$150,000 / $1,000,000
State Custodians Mortgage Company Breathe Easy Offset Loan	Enjoy zero fees and one of the lowest rates on the market.	6.47%	6.36%	$0 / $0	95%	$150,000 / $1,000,000
UBank UHomeLoan (Variable Rate)	One of the market leading variable interest rates.	6.14%	6.14%	$0 / $0	80%	$100,000 / $1,000,000

That is why this guide covers all aspects of debt consolidation so that you can understand the process, assess the implications and decide whether this is the right option for you. We will also cover several debt consolidation circumstances so that you can see that no matter how dire the situation appears to be, some planning, negotiation and budget resolutions can usually see you through.

What is debt consolidation?

It could be that credit is so easy to obtain, it could be that we are all looking for instant gratification in a consumerist society or it could be that we just want to keep up with our friends for the latest homes, cars, looks and technology. Whatever the reason increasing and unmanageable levels of debt are a reality for many Australians and debt consolidation is a solution.

The sorts of personal debt you are struggling with tend to attract some of the highest interest rates in the financial sector – unsecured personal loans, car loans and credit cards are some of the highest interest forms of finance available. With all of these obligations consuming our wages from week to week and month to month, it only takes a small wave to rock the boat and capsize your precariously balanced repayments.

If you get sick or injured, if interest rates rise or you encounter an emergency with one of the kids or at the mechanic’s then you can find yourself under significant financial pressure thanks to your mounting debts. The earlier you seek help and solutions for your rising debts, the easier it will be to get them under control, not only can you avoid the compounding late fees and penalties, you can also preserve your credit rating so that your debts don’t haunt you into the future.

A debt consolidation loan can be that preservation as it allows you to combine all of your debts into a single loan, even if you have fallen behind on your repayments. Finding a way to consolidate your debts even if you are behind on your payments can be a big help because if an emergency has meant you are two, three or four months behind on your credit card repayments for example, it can be almost impossible to catch up, and the late fees and interest charges don’t make it any easier. Instead, a debt consolidation loan becomes just one monthly or fortnightly repayment, much lower than what you have been paying because the loan has a lower interest rate.

While your credit history can be affected if you fall significantly behind in your personal debt repayments, you are able to rebuild your repayment history by making regular, on time repayments to your debt consolidation loan.

When to choose debt consolidation

Debt consolidation can seem like a magical cure-all for your financial ailments, and while it has the potential to relieve the pressures of your debts and free up more cash in your monthly budget, it is not the solution for everyone. For example, if you have travelled too far down the defaulted repayment path, you may not qualify for a traditional debt consolidation loan. As a result you may need to apply for a non-conforming loan which can have a higher interest rate and more restrictive features, and you find yourself in a similar position, with high monthly repayments and no end in sight.

Before you consider consolidating your debts make sure you:

• Compare lender policies regarding debt consolidation. Each lender will have their own loan specialties and their own eligibility guidelines and requirements. Therefore, before you apply for a debt consolidation loan make sure you are working with a lender who can help your situation or you could be declined for the loan, and that too will end up on your credit rating.
• Look at your repayment history. Many lenders will not approve a debt consolidation loan if your debts are already in arrears. In this case you will need to seek a specialised bad credit lender.
• Determine your equity and loan to value ratio. In refinancing to consolidate your debts, your lender will allow a certain amount to be borrowed against your property, using your equity as security. This amount is the loan to value ratio and the amount of security needed and the LVR your lender will allow will depend on your home loan repayment conduct and your current situation as a risky candidate.
• Look at your form of income. If you are self employed or a contract worker you will need to apply for a low-doc debt consolidation loan which can mean you are allowed to borrow less, and have a lower LVR.

If traditional debt consolidation will not be beneficial to you because of one or more of these factors, there are some alternative options which can alleviate the pressure of your debts:

• Debt negotiation. In this instance you have a professional debt consolidation company negotiate your unsecured debts. This can often result in a reduction of your repayments and total debts by between 35% and 60% of their original amount. Your lenders are happy to be getting at least some if not all of their money and your credit file will not be additionally impacted by the negotiations – however, you won’t usually be able to apply for credit with the same lenders for five years.
• Debt agreements. You can either negotiate with the lender yourself to decide on a settlement amount where your debt will be finalised and your creditors will receive some of their owed amount. A Part 9 Debt Agreement is part of the Bankruptcy Act and while allowing you to avoid bankruptcy, should still be taken just as seriously. You can enter into a Part 9 Debt Agreement if you have not been bankrupt in the last 10 years, you have an after tax income of more than $55,719.30 and unsecured debts of more than $74,292.40.
• Part 10 insolvency. Is part of the Bankruptcy Act and allows you to settle your debts with your creditors in a way which will not bankrupt you. You appoint a controlling trustee to negotiate, and the agreement is submitted to and must be accepted by your creditors.
• Bankruptcy. A permanent record of your bankruptcy is kept on the National Personal Insolvency Index, and a trustee is appointed to your case to sell your assets, mandate contributions from your income and investigate your finances to recover any property or money transferred to another person. Bankruptcy usually lasts three years, but can be extended, and your creditors are notified, and stop pursuing you.
• A personal loan. A personal loan can be used to consolidate your debts at a lower interest rate than most credit cards.
• Gifts of money. If family or friends are able to gift you money, this can help you get back in control of your finances, as well as not being obligated in the same way as a loan.
• Redraw from a loan. If you have made additional repayments to your home or personal loan in the past, you may have the facility on your loan to redraw those amounts and direct them towards catching up on missed payments.
• Refinancing. Refinancing a personal loan or a home loan for example allows you to negotiate a lower interest rate and in some cases a more basic loan which is more affordable. At the same time you can extend the loan term to make your monthly repayments more affordable until you are back in control. Just beware that extending your loan term can cost you more in the long run as you are paying interest over a longer period of time.

Debt consolidation can form a part of many of these alternatives as a holistic approach to your finances needs to be taken to ensure the problems are solved, and don’t reoccur. While bankruptcy or insolvency are not ideal there are instances where they are the most appropriate course of action for your situation. There are some cases where simply consolidating debts is not enough for you to control your commitments and opting for insolvency or bankruptcy can be the best solution – however, that is often the hardest part, acknowledging that there is no simple way to repay your debts, and start negotiations or proceedings.

How does it happen?

You may be asking yourself this very question, wondering how you got into this situation of mounting and uncontrollable debts. Or you may simply want to learn more about the circumstances which can lead to insurmountable personal debts, so you can take steps to avoid them. These two examples are very common situations which you may have experienced, or could find yourself in without some careful financial planning.

Refinancing through sickness

Carl is in his mid-thirties and worked full time in an office, where he was on a salary which allowed him to easily meet his day to day expenses. These included his mortgage repayments, his car loans and the minimum repayments on his credit cards.

Unfortunately Carl was struck by a sudden gall bladder problem which meant he lost control of his bowels and had to take six months off from work for treatment and recovery. During these six months Carl had no income coming in, and Carl and his family were forced to pay for their living expenses using their credit cards. Carl also couldn’t meet his loan obligations and defaulted on his mortgage and both his car loans.

As a result Carl’s finances looked like this:

• Mortgage of $202,000 with a $1,500 monthly repayment.
• Credit card balance of $22,000 with a $660 monthly repayment. This card was in default, but Carl had a debt agreement in place to pay just $10,000 of the owed amount, to close the account.
• One car loan of $13,000 with a $390 monthly repayment. Carl was three months behind on his payments to this loan.
• Second car loan for $29,000 with a $900 monthly repayment. This loan was also three months in arrears.

At this point the bank was ready to foreclose on Carl’s home and both his car loans leaving his with nothing, and nowhere to live. The credit card company was willing to take just $10,000 to settle the debt, and this meant Carl’s total loan debt was $254,000 with current monthly repayments of $3,5000. His house was valued at $330,000.

Once Carl had recovered his health he realised that he was in too deep to recover from his financial situation. He was too far behind on his car loans, and coupled with interest charges and penalties the obligations were just too much. So Carl applied for loans with a number of lenders but was refused, so was still looking at losing everything.

Instead Carl worked with a debt consolidation company to refinance all of his debts into one loan facility. The loan would total $254,000 and his monthly repayment would be just $2,438 which reduced the family’s outgoing repayments by almost $1,000 a month. At the same time, the creditors were not pursuing their money and the pressure eases. A debt consolidation loan saved Carl’s home, cars and lifestyle and he has learnt a valuable lesson about living from pay check to pay check.

Recovering from a business loss

Suffering a loss or failure in business is not only financially devastating, but can also be embarrassing as all the people who told you that you were crazy to go it alone are proven right. As a result, it can be hard to ask for help when your business or investments don’t succeed but being able to negotiate with your creditors and regain control of your expenses is best tackled as soon as possible, especially if you don’t have the equity or assets to consolidate your debts into a mortgage loan.

Steve and Susan had been experiencing a number of business and investment disasters and were facing $135,000 in personal loan and credit card debt. Both were earning a good income, but were now struggling to meet their mortgage repayments and had fallen behind with the repayments on their credit cards and other loans. At this point Steve and Susan were looking at selling their home and starting again from scratch, unfortunately this option would still leave them with a significant amount of debt.

The couple were paying $1,100 a month to their home loan and $2,600 a month to their other debts, for total outgoings of $3,700 a month. Seeking debt consolidation refinance and debt negotiation advice, Steve and Susan found that their home was valued at $240,000 and they were repaying just a $130,000 mortgage. Their lender and situation allowed them to increase their loan amount to $216,000 freeing up $86,000 to consolidate their debts. Their debts were then negotiated from $135,000 to the $86,000 they could afford, saving them $49,000 in repayments.

Steve and Susan’s home loan repayment is now $1,710 per month and without their personal debt repayments they are saving $1,990 each month.

The Benefits of Debt Consolidation

Debt consolidation appeals to many people struggling with their monthly bills because it allows you to roll all of your debt into one loan amount and one repayment amount. In consolidating debts you can often save between 35% and 50% on your outgoing costs, as well as stop the harassing phone calls and letters from your creditors.

Debt consolidation can be achieved through a debt consolidation mortgage where you borrow against a mortgage you already hold on your home or an investment property. This helps you clear your other debts and coverts those debts to a lower interest rate loan, as home loans are one of the cheapest forms of finance available. Plus, in consolidating your debts into your home loan, you now have a whole host of loan features which were not previously open to you with a personal loan or credit card debt. For example, you can now choose to fix your interest rate and lock in a repayment amount you can easily budget for from month to month. A debt consolidation mortgage also offers you a lower interest rate because it is a secured loan, unlike the unsecured credit of a personal loan or credit card.

A secured loan means that your lender has the ability to foreclose on you if default on the loan. Where you are in debt with your credit card, the loan is not for one particular item and the credit card company cannot cover their losses simply by taking the card back. In the case of a mortgage, your lender can sell your home to recoup the cost of the loan. For the lender this means the loan is less risky, because there is less chance they will be left out of pocket for your loan amount.

Debt consolidation can be the first step in your financial recovery, as show responsibility in making your repayments to your debt consolidation loan regularly and on time can help repair your credit rating. Plus, now that you have fewer debts and less of your wage is going towards debt repayments each month, you now have the opportunity to grow your savings, to avoid getting into this situation again in the future. If you have a strong emergency fund and savings plan you won’t need to resort to using your credit cards to pay your living expenses and you will be able to cover your mortgage repayments to avoid falling behind.

Hidden Costs of Debt Consolidation

While debt consolidation into your mortgage can see you move from an unsecured loan to a secured loan with a lower repayment, you are also extending your loan term. Where you would pay off your credit card over its natural course of just a few years, when you consolidate your debts into your home loan you now have a 30 year loan term. This can lead you to pay a significant amount of interest if you let your consolidated debts dissolve into your mortgage.

Instead, make sure to consolidate your debts into a sub-account of your mortgage so you can target your repayments and clear this debt faster. This will earn you a lower interest rate, appease your creditors and save you interest in the long run.

You should also be aware that if you consolidate your debts, it can affect your ability to declare bankruptcy at a later date if you are unable to gain control of your repayments. Unfortunately many debt consolidation loans are made to appear attractive to people who are in danger of bankruptcy, with lower interest rates which would appear to get you out for trouble. However, you need to take the time to go over your budget to make sure you can afford the new repayments – which will be lower, but will still need to be made each and every month.

You will also need to be aware that you are now in a very vulnerable position and there are plenty of lenders who will prey on those desperate to take control of their debts. Therefore, you need to make sure you are dealing with a reputable lender, and are refinancing to a loan which will benefit your situation, and help you control your debts in the long term.

When you have significant personal debts, it can be easy to look for a solution which will roll all of your commitments into one loan. However, some lenders will see this as an opportunity to charge high interest rates on your mortgage loan; with all of your debts consolidated into the one loan, you can end up paying the same if not more, and now your home is being used as security.

Debt consolidation can help you avoid bankruptcy which has a devastating effect on every aspect of a person’s life, and you can also be freed from those harassing creditors and that feeling of dread every time the phone rings or a new bill arrives. You should use debt consolidation as a wakeup call, to spur you to make meaningful and lasting changes in your life. Use this as a chance to start living within your means, sticking to a savings plan and building an emergency fund – you will be surprised at how happy and relaxed you can feel in every area of your life when you are controlling your finances, rather than having them control you.

To start making comparisons of debt consolidation loans and your mortgage consolidation options, view the Home Loan Finder comparison tables. Alternatively, you can search for mortgage brokers listed in your area with the Mortgage Broker Finder service so you can find out what loan options are available to you so you can start consolidating your debts today.

Follow these secure links to find mortgage brokers operating in each Australian state.

• New South Wales mortgage brokers.
• Queensland click here mortgage brokers.
• Western Australia mortgage brokers.
• Tasmania mortgage brokers.
• South Australia mortgage brokers.
• Northern Territory mortgage brokers.
• Australian Capital Territory mortgage brokers.

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