When your debt gets out of hand and you find yourself juggling multiple cards and loans, it can be exhausting.
If this sounds familiar, there are actions you can take to rein in your debt and pay it off sooner. Debt consolidation is one option. There are also free advice resources available.
What is debt consolidation?
Debt consolidation could help you to combine your outstanding debts into one convenient loan potentially at a lower rate than you currently pay. Simply put, that’s one loan, one regular repayment, one interest rate and one set of loan fees.
How to consolidate debt?
Step 1: Gather information about all your debts
To take control of your debt it is essential to know how much debt you have. Review your statements and work out the following:
- How much do you owe on each debt?
- The interest rate you are paying on each debt
- What are the monthly fees on each debt?
- Any break costs.
Step 2: Work out how much you can put towards paying off your debt each month
Next, it’s good to know where your money is going and how much you have coming in.
Step 3: Explore debt consolidation options
Now that you know where you stand – how much debt you owe and how much you can put towards your repayments – it’s time to set up a plan to clear it.
Will I be eligible for a debt consolidation loan?
Eligibility for a debt consolidation loan is at the discretion of the bank or lender. Generally speaking you are unlikely to be approved for a loan if you have a bad credit score, a history of late payments, are in default on any other loan repayments or are unemployed or not in regular employment. So if you fit one or more of the above criteria or your debt situation has gotten out of control you are unlikely to be eligible for a debt consolidation loan.
When a lender is judging your eligibility for a debt consolidation loan they will take your ability to service your current debts into consideration even if you intend to pay out those debts with the loan. For example if you have three credit cards with a balance of $10,000 each, you will need to prove you can service the minimum monthly repayments on those debts as well as the debt consolidation loan in order to receive approval.
What are the alternatives to debt consolidation?
If your debt problems haven’t yet gotten completely out of hand and your repayments remain manageable, the best option is always budgeting and smarter management of your finances.
However if you have been rejected for a debt consolidation loan and your debts have become unmanageable there are alternatives for you to consider. An increasingly common option is entering into a debt agreement with your creditors. A debt agreement is a legally binding arrangement between you and your creditors based upon what you can reasonably afford to pay. Similar to debt consolidation they allow you to make a single ongoing repayment to your debt agreement administrator.
Finally in more extreme cases declaring bankruptcy might be the only option available to you. Bankruptcy should only be considered as a last resort and in situations in which you are unable to reach an agreement with your creditors.
Debt consolidation options
There are many ways to consolidate debt:
- Combine your debt into an easy to manage debt consolidation loan
- Transfer your credit card and/or store card debts onto a low rate credit card offering a competitive balance transfer rate
- Consolidate debt with a home loan top-up.
Debt consolidation loans
A personal loan can be a good option to consolidate a range of debts. The main benefit of a personal loan is that it has a fixed term. That means repayments are calculated so that at the end of the loan period your debt is cleared.
By combining multiple debts into one easy to manage personal loan you can potentially:
- Save money by eliminating multiple fees across multiple debts
- Take advantage of a lower interest rate when compared to your existing debts
- Simplify your banking with a single repayment to manage.
Credit card balance transfers
This is generally the best option for consolidating credit card debt. By transferring multiple balances from non-Westpac credit cards or store cards into one low rate credit card you can potentially:
- Take advantage of balance transfer offers to gain some breathing space to pay down the debt without incurring interest, assuming you pay at least the minimum monthly repayment by the due date each month
- Save money by eliminating surplus card fees (if you cancel your other cards)
- Simplify your banking with only one statement and a single monthly payment.
This option requires good discipline as there is no set repayment amount. Remain focused by putting a plan in place to pay off the entire balance during the interest free period. You should also consider cutting up your old credit cards so you don’t end up in more debt. If you are finding it hard to keep up with your billing cycle, set up a direct debit. That way, your credit card repayments will come first.
Home loan top-up
Applying for a home loan top-up can be a quick and cost effective way to consolidate your debt. By consolidating your finances under one home loan you can potentially:
- Take advantage of a lower home loan rate, when compared to other lending options like personal loans
- Reduce the overall amount you pay each month across all your debts
- Simplify your finances with only one monthly repayment.
Be mindful that with a home loan top-up your mortgage repayments are likely to increase. If you opt to keep your repayments the same, your mortgage will take longer to pay off. In both cases, you will likely end up incurring more interest over the long term compared to other options.
If you are finding your debt difficult to manage, the earlier you take action the better. Help is available!
Some of the ways we may be able to help customers include:
- An extension of the loan term to reduce your repayments
- An interest rate reduction
- A short break on your repayments for a fixed period of time.