Debt can add up quickly and sometimes before you know it, you may find your financial situation has escalated into stressful territory as you owe money to a number of different people or providers.
Paying off multiple debts at the same time can be complicated and challenging but debt is usually a part of life so it may be comforting to know that you’re not alone. According to a recent study, the average value of personal debt in Australia for millennials is $56,772 while Baby Boomers have an average debt amount of $31,202. We continue to rely on loans and credit cards which has seen Australia now report to have some of the highest personal debt levels in the world with personal loans making up 3.1% of Australian household debt which is commonly used to buy cars, other consumer items or to pay for holidays.
At Rapid Loans, we understand that owing money or falling behind on repayments can be daunting and anxiety inducing. If you’ve ever wished you could simplify your debt, then a debt consolidation loan could be your answer!
What is a debt consolidation loan?
If you’re struggling with multiple debts, each with specific interest rates, conditions and balances then why not roll them into one consolidated loan? A debt consolidation loan is a single loan taken out that pays off other loans you may have, simply by bringing all your existing debts together into one new easy-to-manage loan. These loans are specifically designed to make it easier for people just like you who need to pay down multiple high-interest debts. Also known as refinancing, they’re often used to pay off personal loans, car finance and other consumer costs.
We offer debt consolidation loans because they enable you to:
- Simplify your finances and prove to yourself that you can manage your money well.
- Let go of worry about your finances and reduce the stress of juggling multiple debts and interest rates.
- Make it easier to manage your repayments by giving you a structured repayment plan.
- Have greater control over your financial situation.
Everyone’s debt situation is different but having a debt reduction strategy can help you reduce fees and rates, give you a light at the end of the tunnel to help you stay motivated as you pay off your debt and allow you to better juggle your budgeting.
Taking your debt back into your own hands also means you may be able to use the opportunity of taking out a debt consolidation loan to reduce the overall amount of interest you pay. This will help you pay off your debt faster as more of the repayment amount goes towards the debt than the interest. A debt consolidation loan can also lower your overall monthly payment by extending the overall period of the loan to make it easier to pay off all the debt.
A debt consolidation loan with Rapid Loans can help you make debt a thing of the past as we’re all about helping you achieve your goals, whatever they may be.
What happens when you consolidate debt?
What if paying back your loans was easier than you thought? Don’t let the sheer size and number of your existing outstanding debts get you down, there are steps you can take to relieve financial pressure.
Before applying for a personal loan, the first step is to get a clear picture of what you owe and what budget you’re working with. Talk with your providers and make a list of all your outstanding debts on the accounts that you want to pay off, making sure to include the interest rates, total balance, total remaining payments and minimum monthly payments. This is important as you’ll also need to provide your new lender with official pay out quotes from the lenders you wish to settle your debt with. It may be a confronting task but it shows that you’re taking steps to be disciplined and are committed to eliminating this debt from your life!
Essentially, you then apply to take out a new personal loan! Rapid Loans personal loans range from $2,001 up to $40,000, although how much you can borrow depends on a number of circumstances such as your income and regular expenses. Your preferred lender will also check your debt-to-income ratio (DTI) which is the amount you owe versus the amount of income you bring in each month.
When applying with Rapid Loans, getting your documentation ready to support your application for a loan is not hard. There are three basic things we need to know:
- Your identity.
- Your financial circumstances.
- Your lifestyle.
If approved, you’ll then receive a new loan with new terms and a new interest rate! Rapid Loans will use the funds to pay out your existing loans on your behalf and you will be required to make payments for the new debt until you have paid it in full. Having a single repayment should give you peace of mind and allow you to take steps to become more financially stable as you know exactly when and how much your repayments will be whether you choose to make your direct debit weekly, fortnightly or monthly.
Once you’ve completed the consolidation process, stick to the plan you made and avoid adding new debt to what you’re working with to help pay down your balance sooner, otherwise it could be like taking two steps forward and one step back. It’s important to note that you won’t be able to borrow more than the originally agreed-upon loan amount when taking out a debt consolidation loan.
What is debt settlement?
Debt settlement is different from debt consolidation as you work with an independent entity to lower what you owe each lender by offering a lump sum in exchange for a portion of your debt being forgiven. The process is also known as debt relief but it’s worth noting two things – firstly that creditors are under no obligation to reduce your debt and secondly that these independent entities don’t actually offer loans but simply try to renegotiate your current debts and usually charge a fee for this service.
Debt settlement tends to take a long time and may end up costing you more than taking out a debt consolidation loan. During this time you may also accumulate late fees and interest which add to your balance and make it harder to pay off your loan if debt settlement negotiations aren’t successful. People are inclined to choose debt settlement as it can save you money by allowing you to resolve your debts for less than the full balance, so it can be a way out for some individuals who can’t afford to pay back the full amount they owe. However, it’s important to consider that the savings made from undergoing this process can end up being paid back to the company that assisted with getting this lower settlement as a service fee.
Does debt consolidation affect credit score?
There are a few short term causes of a credit score drop when you choose to take out a debt consolidation loan. These include:
Applying For New Credit
When you apply for a personal loan or balance transfer credit card, the lender will perform a hard inquiry on your credit to assess your creditworthiness which will lower your credit score by a few points. It’s worth noting that applying for too many debt consolidation loans in a short span of time can further lower your credit score.
Opening A New Credit Account
Opening a new credit account with a personal loan lowers the average age of all of your accounts and temporarily lowers your credit score as lenders look at new credit as a risk. Lower Average Age Of Credit As your credit accounts get older and show positive history and on-time payments, your credit score rises! However, when you open a new account it ends up lowering the average age of credit which can lower your credit score. Lower Credit Utilisation Ratio This measures the total amount of credit you are using versus the total credit that is available to you. When a new loan or credit card is approved, it decreases your credit utilisation ratio which in turn leads to an improved credit score.
Unfortunately, consolidating your debts can negatively impact your credit score initially. However your payment history is the biggest factor in your credit score so if you continuously make on time payments on your new loan and pay it off within a reasonable amount of time, you may see your credit score slowly rise. If you end up overextended and unable to pay, missed payments will further damage your credit score. You can still consolidate debts if you have a lower than average credit score, however lenders may apply a higher interest rate based on your credit score and historical ability to meet your repayments. As long as you manage your debt responsibly and are diligent with your repayment plan, any negative effects will be temporary as the overall changes to your credit score from a debt consolidation should be positive!
What are the risks of debt consolidation?
There is always a degree of risk involved with taking on debt, regardless of whether it’s good or bad. Some things you should consider are:
- Be sure to review the fine print for any balance transfer fees, closing fees, loan origin fees or any other overhead costs involved with your current providers.
- It’s important to pay attention to the payment schedule of your new debt consolidation loan as a longer repayment schedule could mean paying more in interest rates in the long run.
- Consolidating your debt means that you’ll free up additional credit so if you’re not careful you may end up accumulating more debt than you started with. Consider taking steps to cut down on any buy now, pay later purchases which may end up adding negatively to your financial situation.
What things should you look out for when getting a consolidation loan?
It can be helpful to start by reading the fine print of your existing loan contract and the agreement for any new loan you are considering before you make a decision, but here are somethings you can look out for:
- Compare the interest rates for the new loan, as well as the fees and other costs against your current loan to make sure you can afford the new payments. It’s worth noting that Rapid Loans offers fixed interest rates for personal and car loans, however this will vary depending on a number of factors such as your borrower profile, loan product and the principal amount.
- Check if there are any hidden costs or penalties for paying off your original loans early. Additional fees might come with origination (a fee to process your loan application), balance transfer or closing costs. It might be helpful to do the maths for your specific debt to make sure you’ll save more than any fees you’ll pay for balance transfers. Rapid Loans does not charge any fees for early payouts or additional repayments on top of the normal schedule as we believe the choice to pay off your loan quickly should be available to you.
- Confirm the length of the term as your interest rate may seem lower but you could actually be paying more in interest and fees in the long run.
- Take the time to calculate what is a comfortable repayment term for your financial situation so you don’t risk paying late fees and further interest. Consider a clear repayment schedule that lets you honour your commitment to repayments while comfortably paying your other living expenses. Overall, a debt consolidation loan should help make your repayments more manageable as you’ll typically only be making one repayment rather than multiple amounts.
Is debt consolidation a good reason to get a loan?
Being proactive and taking control of your debt as soon as you feel it getting out of hand can save you money and help you stay in a good position to take on other loans in the future. One of the best ways to significantly reduce the unmanageable feeling surrounding handling several different debts is to organise and merge it all into the one place, but don’t expect to see a change if you don’t make one!
As you’ve probably worked out by now, a lower single interest rate may be better for your situation than having many variable interest rates! Debt consolidation is advantageous when you are able to achieve an overall lower cost of credit, as it allows lower payments which can free up cash which can be used on larger payments, saving for an emergency fund or investing the remainder.
A debt consolidation loan can provide you with fixed payments over a fixed period of time, this streamlining of all your loans makes it easier to manage and compare while giving you the confidence that the overall debt will be paid off when the loan finishes. A debt consolidation loan can help lower stress from managing multiple bills so you can look forward to being debt-free sooner. Another big upside of going through the debt consolidation process is that it can ultimately cut down correspondence from multiple collection agencies if you forget payments!
It’s important to remember that debt consolidation is not the same thing as getting rid of your debt completely. You’ll still have to make your debt payments, even if you’ve restructured everything into just one payment.
What are my alternative options for paying off multiple debts?
Before deciding if a debt consolidation loan is right for you, you might want to try sorting your debts out yourself by using a debt payoff strategy which will cause you to restructure the way you pay down your debt each month. Here are some strategies you can look in to.
Snowball Strategy
The snowball strategy means that you make additional payments on the credit card or loan with the smallest balance until it’s paid off, then repeat with the next smallest balance until all your debts are paid in full. This quick win is best for people who need immediate results to stay enthusiastic and can help you stay motivated because you’ll see success early in the process as you eliminate smaller balances.
Avalanche Strategy
The avalanche strategy means that you focus additional payments on the credit card or loan with the highest interest until it’s paid off, then repeat with the next highest interest rate until all your debts are paid in full. This is best for people who can stick with long-term goals even without immediate results and may help you save more money on interest overall.
Consolidating your debt can be a daunting task, but with the right strategy it can become a little less intimidating. At Rapid Loans, you can speak to one of our experienced loan consultants who will give you answers, and help you get your consolidation moving. No matter what situation you’re in, it’s always reassuring to know that you have options!
Sometimes things happen, and debt consolidation could be a suitable option for you. Rapid Loans offers debt consolidation loans which are easy to apply for online. We offer tailored payment schedules to suit your lifestyle, offering weekly, fortnightly and monthly repayment options. You’ll also have the support of our dedicated loan consultants throughout the life of your loan.
Click here to apply for a debt consolidation loan today through our easy to use online application form to take back control over your finances.