If you’re struggling to juggle a raft of repayments and credit card balances, you’re not alone.
At the beginning of 2021, there were 13,554,221 credit cards in Australia as of January 2021, netting a national debt accruing interest of $20.9 billion.
Around 45% of Australians use at least one credit card, with an average balance of $1,501. And almost 30% of us say we couldn’t manage our regular finances without a credit card. With credit card interest rates often surprisingly high, a little credit card debt can become a long term problem that is hard to pay off. Even harder when you factor in the late payment fees most Australian credit card holders have had to pay at one time or another.
When Australians find it hard to meet their minimum monthly credit card payments, they may turn to their savings, or to family and friends to help them out. Of course, this is not always an option, so in the first instance talking to your loan or credit card provider is a good idea in the short term. All lenders have programs to help their customers in tough times. Ask to speak to their hardship team - they may be able to change your loan terms or pause or lower your credit card repayments for a while. Alternatively a credit card balance transfer may be a step in the right direction, if the interest rate is initially lower than your current card.
A longer term approach to debt
According to the Reserve Bank of Australia, the average standard credit card rate is 19.94%. This is usually much higher than personal loan interest rates. Which is where debt consolidation loans can be really helpful.
A debt consolidation loan is a kind of personal loan, and can be a helpful tool to get credit card debt under control. By consolidating multiple outstanding debts into one low rate loan, with one monthly repayment, a challenging situation can become one that is much easier to manage.
As with any financial product, there are important watch outs to be aware of.
- Check to see if you have any ongoing fees for your current loans. You’ll need to factor those into your decision to consolidate your debt with another loan provider, to check it’s worth moving forward.
- Avoid the temptation to borrow more money than you need to pay off your existing debt. You may be offered more credit than you initially ask for, but this doesn’t always mean it is the best option in the long run.
- Be very clear of the interest rate, fees and penalties associated with any loan. By checking the comparison rate you are better able to compare apples with apples, however, always be sure to read the fine print. This includes checking to see if you will be penalised for paying back your loan early, which can be a real sting in the tail.
- While a longer-term loan may help you lower your monthly repayments, and may have a lower interest rate, you could pay more in interest and fees in the longer term.
- Check how much you’ll be paying across the total of all the repayments and how it compares to your current debts - could you do better, and pay less elsewhere?
- Look for a company that is licensed and on the ASIC Connect Professional Registers.
- If they’re not listed they may be operating illegally. There are scams operating in Australia where customers pay setup fees but never receive a loan. You can also call ASIC’s Infoline on 1300 300 630 to check if your loan provider is operating legally.
- If you are considering a secured debt consolidation loan, be aware that the asset you put up as security is at risk if you are not able to pay off the new loan. The lender can sell it to retrieve the money you owe. So while a secured loan can offer a lower interest rate, be aware of the risk to you, and to those who may also own that asset.
- When you consolidate into one loan, you will only have one lender. So if you get into financial difficulties again, you’ll only have one organisation to negotiate with. When looking at new lenders, do some research so you are aware of their reputation with other customers and their financial hardship policies.
- Beware of ‘Government backed schemes’ - these can actually be a Part IX Debt Agreement under the Bankruptcy Act. These agreements have serious consequences and are usually expensive.
Find the best debt consolidation loan for you: 5 ways to compare
When you’re looking to streamline your finances or need a little help making a big idea happen, getting a debt consolidation loan is personal. Everyone is different, which means when it comes to finding the best loan, it’s not one size fits all. The best debt consolidation loan for someone else may not be the best deal for you.
So how do you compare the market?
When you’re taking stock of your new approach to your debt, think about:
- your current debts and expenses you’d like to consolidate with the loan
- your credit score, income and assets
- your ability to repay a particular amount off the loan each month
This information will help you assess how a loan meets your individual needs. And from there, there are 5 main ways to compare one debt consolidation loan to another, helping you compare apples with apples – so you can be confident you’re choosing the best loan for you.
1. Type of Loan: Unsecured v Secured Debt Consolidation Loans
There are two types of debt consolidation loans – secured and unsecured. The difference between them is about what you bring to the table to help reduce the risk of your loan for your lender. And that can affect the loan amount, length or interest rate they’re willing to offer. So when you’re deciding on the best loan for you, it’s important to make sure you’re clear on your options and what they mean to you.
Secured debt consolidation loans
If you already own something of financial value, like a car, home or term deposit, you can use this asset as security for a loan. It means that in the unlikely event that you’re unable to make your repayments, you give the lender the right (usually in the form of a mortgage, caveat or charge) to seize and sell your asset to cover the cost of the loan.
Because of this, secured loans are less risky for lenders. And that often means a lower interest rate for you. It may also allow you to borrow a larger amount or for a longer period than would be available to you if the loan was unsecured.
Unsecured debt consolidation loans
While there are benefits to a secured loan, the vast majority of debt consolidation loans are unsecured. With an unsecured loan, no assets are used as security against the loan. In this case, a lender will decide whether or not to provide you with a loan based solely on how creditworthy you are. Put simply, they’ll consider how likely you are to make your repayments on time or default on the loan. Part educated guess, part trust, unsecured loans are a bigger risk for the lender, so they may offer you a loan with a higher interest rate or a lower amount.
2. Interest Rates
Interest rates vary depending on the lender, your credit history, your repayment schedule and a range of other factors. There’s a bit of science to it, but they’re typically based on the lender’s calculation of risk (for you as an individual and the market as a whole) and their underlying costs (because it costs a lender money to give you money).
Many lenders market their products using a ‘headline’ advertised rate, which is the best rate they’re able to offer a customer. Often this low rate is available to only a small proportion of borrowers – it may not be the rate they offer you. There also may be other costs associated with your loan and, depending on your loan agreement, the interest rate you pay may change.
To level out the playing field, a good starting point is to look at a lender’s comparison rate.
What is a comparison rate?
A comparison rate represents the overall cost of a loan, including the interest rate and fees, expressed as an annual percentage. As a result, the comparison rate is usually higher than the interest rate charged on the loan. Under the National Consumer Credit Protection Regulations, lenders must provide a comparison rate when they advertise an interest rate.
For debt consolidation loans, there is a standardised measure for how comparison rates are calculated:
|Length of loan||Loan comparison|
|For loans 3 years and under||Comparison rates are calculated on a $10,000 loan amount over 36 months|
|For loans 4 years and over||Comparison rates are calculated on a $20,000 loan amount over 60 months.|
While the comparison rate is a handy way to compare the same for the same, it’s important to remember that not all costs are included. For example, you still need to consider late payment fees, early repayment fees and deferred establishment fees.
You should also remember that interest rates aren’t set in stone – they can and do change over time. However if you’re looking to lock in your interest rate, you may be able to choose between a fixed and variable interest rate.
With a fixed-rate debt consolidation loan, the amount you pay in interest is set from the beginning until your loan is repaid. This means your weekly, fortnightly, or monthly repayments remain the same and won’t change. So you can lock in a competitive rate with the security of knowing your repayments will remain steady regardless of changes in the market. This helps manage a budget.
A variable-rate debt consolidation loan the interest rate can change or vary over the life of the loan. Variable interest rates can change for a number of different reasons, including market changes and the lender’s cost of funds. They can also vary between loan providers. Because of this uncertainty, variable rate loans have a lower starting price than fixed loans. And they often have fewer repayment restrictions, so you can make additional repayments or repay your loan early without getting charged an early repayment fee.
3. Fees and Charges
Remember how we said it’s important to factor in the fees you have to pay on your loan? Here’s what you need to look out for and how they can impact your loan.
Upfront fees, also known as establishment fees or credit assistance fees, are ‘once-off’ charges that are applied at the start of a personal loan.
These fees might look small but remember, upfront fees are usually added to the amount you wish to borrow. For example, if you’re borrowing $10,000 with an upfront fee of $300, the total amount of your loan will be $10,300. Remember, on an upfront fee of 4%, you could be paying $1,200 on a $30,000 loan, meaning you’ll be charged interest on a $31,200 balance. It makes a big difference.
So if you’re considering a lender with a low interest rate, be sure to check there isn’t a high upfront fee that outweighs the benefit of the lower rate.
Ongoing or Monthly fees
Also known as account keeping fees or loan management fees, these are fees that are paid every month across the life of the loan. But it’s money that goes straight to the lender without reducing the amount you owe.
Early Repayment Fees
If you can manage it, repaying your loan as quickly as possible is a smart way to reduce the overall amount of interest you pay on your loan. However, the last thing you want is to be hit with an early repayment fee (also known as an exit fee) that undoes all your hard work.
Penalty fees are just money down the drain when things don’t go quite to plan. Be prepared by knowing exactly what the penalty fees are and make sure they’re not excessive.
4. Flexibility of Loan Length
Debt consolidation loans can be for different lengths of time. You can expect a loan term of between 2 and 5 years, but they can sometimes be up to 7 years. A longer loan term can help you be approved sooner, as the monthly repayments are lower. A shorter loan term will cost you less in the longer term, with less interest paid.
But it’s good to know loans aren’t necessarily set in stone. Look to see what flexibility there is to change your loan term, either shorter or longer, and what fees may apply.
5. Customer Service and Responsiveness
Lastly, the best debt consolidation loans aren’t just about what’s written down in black and white. Choosing a debt consolidation loan provider with a good reputation for customer service can make a big difference to your overall satisfaction with your loan. Whether you need a loan application approved quickly or just a little extra help to complete your application, you need the support of a friendly, helpful and responsive team.
Check a lender’s ratings or recommendations on review sites to see what their customers are saying about their service.
Need help finding the best debt consolidation loan for you? Whether you need a loan rate comparison or want to learn more about what’s possible for you, our friendly team is here to help. Get in touch today.