Multiple loans or Credit card debt consolidation is the process of combining a number of existing credit card and loan debts into one convenient loan with one set of loan fees to better manage your repayments. Your debts may consist of credit cards, medical and legal fees, utility bills or personal loans, and consolidation of these will minimise the number of fees and interest you’re paying. A debt consolidation personal loan or a balance transfer credit card are two ways in which you can consolidate multiple debts. In order to have this loan work for you, it’s essential to check that your consolidated debt’s interest rates and/or fees are not higher than what you were paying on your previous debts.
How does consolidating multiple loans and/or credit cards work?
Start by gathering information about all your debts. Asses how much you owe, the fees and interest rates you are paying on each debt and determine what you can realistically afford to repay in order to make your credit more manageable.
An example of consolidating your debts would be if you owed $1,500 on your credit card, $1,500 on a store card, and $3,000 on a personal loan, you can apply for a debt consolidation loan of $6,000. This way you only one payment to make and no longer have to deal with multiple creditors.
There are two ways in which you can consolidate and manage existing debt. Good credit debt consolidation involves taking out an unsecured personal loan or balance transfer credit.
A personal loan can be used as a form of debt relief and by consolidating a range of debts into one loan you can potentially save money by eliminating multiple fees across all the debts. The primary benefit of a personal loan is that it has a fixed term meaning repayments are calculated so that by the end of the loan period your debt is paid in full. The convenience of just one loan to pay off means you are able to budget more efficiently and compared to the accumulative costs of several individual debts you are able to save long-term because of a lower interest rate.
If you have a number of credit cards and/or store card debts, generally the best way to consolidate these is to transfer these creditor debts onto one low rate credit card offering a competitive balance transfer rate. A simplified option with just one loan and one payment means you can save significant amounts in eliminating additional card fees. These types of balance transfer loans usually have promotional offers where you take advantage of a period of 0% interest.
The downside to a balance transfer options, is that if you don’t pay off the balance in the promotional period, fees revert to a rate that will likely be much higher, and some lenders will place restrictions on this loan, such as not being able to transfer more than 80% of your credit limit on some cards.
If you are looking to consolidate bad credit debt, this will require a debt agreement, which is a form of bankruptcy. This may have serious future credit implications for you so be sure to check with an advisor before completing this application.
Interest rates and fees
It is not uncommon for lenders to use what is called “risk-based” pricing. They use this to measure the risk you represent or likelihood of defaulting on repayments. The higher the risk you represent, the higher the interest rate you are likely to pay.
Applications are assessed on your personal circumstances, so you will receive a personalized interest rate.
There are various fees due when taking out a consolidation personal loan such as a loan approval fee to arrange and administer your loan which is usually added to the balance. Maintenance fees, origination fees, monthly administration fees and exits fees are all additional cost.
Exits fees are charged by some lenders if you repay your loan in full before the end of the loan term regardless if your loan if fixed or variable early settlement fees may apply.
Take the time to calculate what a comfortable repayment term might be for you and consider a repayment structure that allows you to manage living expenses and your commitment to loan repayments. Look out for repayment penalties or pay out fees. If you pay your loan off earlier than originally agreed, some lenders may add these fees to your repayments.
The minimum eligibility criteria will be listed on your lenders’ website, and you can confirm you meet these criteria before submitting your application. Simply meeting the eligibility criteria, however, does not guarantee you will be approved; each application is judged on a case-by-case basis, and your approval depends on your ability to afford the loan repayments.
Below is a list and not exhaustive
- Financial documents would include proof of income, pay slips, notice of assessments if you are self-employed and bank statements.
- Employee details or self-employment details
- 18 years and older
- Clean credit records
How to apply for a Loans to Consolidate multiple loans and/or credit cards
You will need to complete the standard application process for your loan or new credit card. Prepare all your application documents before applying and check you meet the eligibility criteria. Knowing your credit rating and serviceability prior to submitting an application will help you prepare any supporting documents to justify your credit score and may help to speed up the approval process.
You will then provide your new credit card company with the details of your original account(s), so the balance can be transferred. It’s important to remember to cancel all outstanding credit cards, so they do not continue to charge additional fees. Consolidating your debt means that you’ll free up credit be aware of the potential to accumulate more debt.
Advice, tips and considerations
If you have some equity in your home, consider applying for a home loan top up to consolidate a large amount of debt.
This type of loan is a simple and competitive consolidation option to combine your debt and benefit from the lower interest rate compared to personal loans. You are able to reduce the overall monthly repayments and if you opt for fixed rates you can secure set repayments for the duration of the loan term. This will, unfortunately, extend your loan term and increase your interest over the term period because of the extended time it will take to repay the loan.
The last tip would be to do your research. You really want to be working with a legitimate credit provider or a debt consolidation organisation so make sure they are ASIC licensed and registered.
Frequently asked questions
What is an origination Fee?
This fee covers the cost of processing your loan application and charged upfront. The actual cost of this will vary from lender to lender and based on the complexity of your application.
How would a debt consolidation loan help me?
Consolidation loans are one of the best ways to help people with bad credit. These loans have the advantage of fixed repayments and loan terms to suit your budget. So, if you are struggling to manage multiple creditors, it makes sense to secure a repayment plan with a fixed interest rate as this helps to budget more efficiently. Payment credibility and consistency will help re-establish a good credit history.
When do I need to provide security for my loan?
If you decide to make application for a variable or fixed rate personal loan you will not need to provide any security as these are unsecured loans. When you apply for a secured loan, you will be asked to provide some sort of security against your loan such as property or a car depending on the loan purpose.
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