Managing your debt with just one monthly payment is an attractive feature of debt consolidation loans. This type of loan allows you to combine several individual debts to save on excess fees and varied interest rates. An unsecured loan is a loan that you do not have to provide security against.
How does an unsecured debt consolidation loan work?
The principle behind consolidation is straightforward. It takes unsecured personal loans (your debts) and combines them using a debt consolidation loan. All your unsecured loans and debts such as credit cards, store accounts or utility bills are paid off resulting in just one loan securing a fixed interest rate and one monthly or fortnightly payment.
If you find your trying to manage several creditors and payments each month first step, is to calculate what you owe across all your current unsecured debts and the interest on the account balances. It may be worthwhile checking at this stage that none of the debts you intend on paying with this loan will apply penalties for early settlement.
Once you have researched lender rates fees and products that best suit your financial situation you can compare what you are currently paying against their loan costs and make sure you are saving with lower interest rates and lower monthly repayments.
Unsecured debt consolidation options
In order to minimise ongoing expenditure in fees and interest and to make your credit more manageable people often look to debt consolidation options. Debt consolidation can be divided into two categories, good credit debt consolidation and bad credit debt consolidation.
Good credit debt consolidation involves taking out an unsecured personal loan or balance transfer credit card to consolidate multiple credit accounts.
- An unsecured personal loan is essentially a new loan with a lower interest rate and fees, taken out to pay off other individual debts.
- Balance transfer credit card simply allows you to apply for a new credit card with a higher limit and transfer all personal loan debt to this one card.
- Last option would be to refinance through your mortgage, this option allows you to consolidate debts but does increase the loan term.
Bad credit debt consolidation will require a debt agreement or an unsecured debt consolidation loan which is a form of bankruptcy.
- A Part 9 Debt Agreement is a form of bankruptcy and an agreement between you, the lender and your creditors to stop all accruing interest and any civil actions against you.
- Those with a poor credit history, there are still debt relief options available to you such as an unsecured debt consolidation loan that specifically caters for high-risk credit borrowers. Due to past repayment defaults, this loan will have higher interest rates due to the increased potential of reoccurring defaults. It allows you to consolidate your personal loans and credit cards to save on multiple and varied interest rates.
Unsecured debt consolidation interest rates and fees
The ability to plan a monthly budget with equal monthly repayments makes financial goals more attainable. And it is interesting to note that debt consolidation loans have a rate 5.47% lower than the average credit card.
Most lenders will offer variable interest rate ranging from 8.99% to 17.99% p.a. and the ability to access an ongoing reusable credit facility at a variable rate, without needing to reapply.
Additional fees that may apply include establishment fees and monthly management fees you can discuss these with your lender prior to signing any acceptance documents.
The application process for unsecured debt loans or personal loans is simple and straightforward, however, each lender will have a different credit approval process and your loan will be subject to their eligibility criteria and passing a credit check.
Some of the basic application requirements would include:
- Min application age 18 years old
- Proof of employment Full time, part-time or self-employed
- A clear credit history with no defaults (paid or unpaid)
- Not have filed for bankruptcy or have a pending court judgement
- Require a loan of between $5,000 and $40,000
- A loan condition would be to pay the loan off between 18 and 84 months (this will vary with each lender)
- Single borrower only -no joint applications
- 100-point proof of identification-Australian Passport, Australian Drivers Licence or a Medicare card
How to apply for an unsecured debt consolidation loan
Depending on the financial institution you approach there are advantages to this type of debt relief.
The application form can be filled out online or in person and submitted for review which can take as little as a few hours to process, if all your information is correct and verified.
The loan amount you will be approved for will depend on your lender’s eligibility criteria, the type of debt (high risk, low risk), the amount of debt you wish to consolidate and your personal circumstances.
Unsecured personal loans are a good option because they keep the debt unsecured meaning your home or assets are not used as collateral and therefore are not at risk. Consolidation loans come with shorter loan terms from 1-7 years, avoiding prolonged debt and saving you interest.
If your credit score has suffered under all your debt, consider applying for a consolidation loan it’s a great way to rebuild a good credit rating provided you pay the loan off promptly.
Advice, tips and considerations
There are certain things you should avoid when consolidating your debt and first up would be to misrepresent what you are using the loan funds for. Always remain transparent and honest about why you are applying for a loan
If you are taking out an unsecured loan to consolidate existing debts, make sure you avoid excessive fees and charges. Compare all costs of the new loan against what you are currently paying
All providers must be licensed with ASIC. Make sure you are getting an unsecured personal loan from a licensed lender and if you are not sure you can search through the ASIC Professional Register to check this.
Frequently asked questions
Why is the interest rate higher on an unsecured loan compared to a secured loan?
A secured loan means you have used collateral against your loan which lowers the risk for the lender because he has an asset to sell to regain his money if you default on payments. An unsecured loan means the lender has nothing more than your repayments as a means of recouping outstanding amounts, so interest rates are higher to compensate for the risk.
Is it a good idea to consolidate my debt into my home loan?
Depending on your personal circumstances, it’s important to evaluate the different options and advantages for your present needs. Home loan interest rates are quite attractive, with most being around the 5% mark. Do the calculations because by merging your individual debts into your home loan you may actually end up paying more in interest, because of the extended time frame it will take to paying off.
What features should I look for in a debt consolidation loan?
This is personal preference and will be unique to your circumstances, but if you are aiming to pay off your loan as fast as possible, you will want to look for a loan that allows you to make additional payments to reduce the term with low and variable interest rates.
How does a comparison rate work?
This is a rate that takes fees and charges of a loan plus the interest rate into account to work out the true cost of your loan. This rate gives you a fair indication of what it will cost you with all administration and management costs accounted for.
What is the difference between a debt consolidation loan and an unsecured personal loan?
There are several different types of debt consolidation loans. Some loans are termed as “debt consolidation loans” while others are simply suitable for this purpose. A debt consolidation loan is specifically used to pay out your current credit accounts on your behalf the amount you’re approved for may depend on the level of debt you have.
Need help getting out of debt? Give us a call
If you are applying for an unsecured personal loan it is suitable to use for the purpose of debt consolidation but there is no guarantee they will approve you for the full amount that you owe. If you are in debt and would like to know more about the various options available to you contact us