The type of debt consolidation loan, its conditions and how quickly you pay it back impacts how much a loan costs you over its lifetime. You need to do your homework to decide what is the best debt consolidation loan for you.
To work out the overall cost of your debt consolidation loan, you need to factor in:
1. Debt consolidation interest rates: Fixed or variable: The biggest factor in how much a debt consolidation loan will cost you is the rate of interest you’ll pay on the amount borrowed. If you are opting for a variable rate loan, it is best to also calculate a worst-case scenario, one where a loan's interest rates rise significantly in the future to be sure you have a comfortable buffer in the event things change.
2. Upfront fees - The ‘establishment’ or application fee can vary greatly, so it’s an area where shopping around can make a difference. A loan with a low interest rate could have high fees attached.
3. Ongoing fees - Ongoing fees that occur throughout the loan: Any monthly or annual fees (e.g. account keeping fees), any default, dishonour or missed payment fees, and any other hidden fees — check the terms and conditions to find these.
These three costs can be combined to create a comparison rate. As long as you are comparing the same debt consolidation loan terms and amount, a comparison rate helps you to compare the cost of different loans.
There may be fees for early repayments or if you pay back the loan in full early. Be sure to balance these against the benefit of reducing the amount you owe and therefore pay in interest.
Always shop around and use comparison tables, a repayment calculator and the comparison rate as a guide.
Debt consolidation loan interest rates
The interest rate, also known as Annual Percentage Rate (APR) or Advertised Rate, is the percentage that you’ll pay on top of the amount you borrow in interest, usually expressed as an annual rate. Interest rates vary depending on the lender, your credit history, your repayment schedule and a range of other factors. They are based upon the lender’s calculation of risk (for you as an individual and the market as a whole) and their underlying costs.
Many lenders market their debt consolidation loan products using a ‘headline’ advertised rate, which represents the best rate they are able to offer a customer. This low rate is often available to only a small proportion of borrowers.
Before you apply anywhere, it pays to do your research and get a personalised rate from a number of providers. You just need to make sure that the lender’s quote process is ‘credit score friendly.’ That is, they only conduct a soft-check on your credit file, which won’t impact your credit score. Asking Plenti for a RateEstimate will not affect your credit score.
The loan with the lowest interest rate does not necessarily mean the best debt consolidation loan for you. You need to consider the total cost of the loan, including interest, fees and other costs to truly assess the value of any interest rate on offer.
Debt consolidation loan interest rates will vary according to the type of loan: secured or unsecured. Usually a secured debt consolidation loan will attract a lower interest rate than the rate for an unsecured loan, because you’re offering something as security against defaulting on the loan.
Debt consolidation loan comparison rates
The 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 car loans, there is a standardised measure for how comparison rates are calculated:
- For car loans 3 years and under, comparison rates are calculated on a $10,000 loan amount over 36 months
- For car loans 4 years and over, comparison rates are calculated on a $30,000 loan amount over 60 months
Whilst the comparison rate is a useful tool for comparing debt consolidation loans on a like for like basis, 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.
Debt consolidation loan repayments
Your loan repayments are the amount you agree to pay to your lender on a regular schedule. Repayments can be weekly, fortnightly or monthly and vary by lender. Whereas interest rates and comparison rates can sometimes hide the true cost of a loan, your monthly and total repayments provide a clear basis for comparing the value of loans from different lenders. When making your comparisons, however, it is important that the loan repayment calculations have been quoted inclusive of any ongoing fees for all lenders.
Upfront fees, also known as establishment fees or credit assistance fees, are ‘once-off’ charges that are applied at the commencement of a debt consolidation loan. These fees can be:
A flat fee (e.g. $150) that applies regardless of the value of the loanA tiered fee (e.g. $250, $500, $750) based on the total amount borrowedA percentage fee (e.g. 4%) based on the total amount borrowed and the credit or risk profile of the customerA hybrid fee (e.g. $200 + 2% of the loan amount)
Upfront fees are usually added to the amount you wish to borrow. For example, if you are borrowing $10,000 with an upfront fee of $300, the total loan amount on commencing the loan will be $10,300.
Why is this important? Well,that interest rate you are being offered will be applied to the total loan amount – inclusive of your upfront fee. In the case of a small upfront fee, the difference might be a few dollars on each repayment. On an upfront fee of 4%, however, you could be paying $1,200 on a $30,000 loan, meaning you will be charged interest on a $31,200 balance. Ouch!
If you’re considering a lender with a low-interest rate, it’s important to make sure there isn’t a high upfront fee that outweighs the benefit of the lower rate. This is particularly true of percentage-based fees that flex with the amount being borrowed. Checking the comparison rate and the proposed repayments will allow you to assess this compared to other lenders.
Ongoing or monthly fees
Ongoing fees, also known as account keeping fees or loan management fees, are fees that are paid every month across the life of the loan – without reducing the amount you owe. For example, a $10 monthly fee on a 5-year loan adds up to $600 across the life of the loan. That’s a lot of money that’s not going to repay your loan principal.
Banks and larger lenders often have lower upfront fees that are offset with a monthly fee of $10 to $13. This means the net cost of the upfront fee and the monthly fee may be higher than you otherwise would have paid for a lender with a higher upfront fee and no monthly fees. In the end, it pays to do the maths on ongoing fees before you commit to a particular lender.
Early repayment fees
Repaying your debt consolidation loan as quickly as possible is a clever strategy as it will reduce the overall amount of interest you pay on your loan. However, if you do find yourself in a position to do this (well done!), the last thing you want is to be hit with an early repayment fee also known as an exit fee.
Early repayment fees can range from $0 up to $800 or a % of the loan value on repayment, with $150-175 being the most common fee. That’s a fair amount for you to pay for doing something that’s good for you. Therefore, it pays to read the fine print on fees before you commit to a loan.
It’s worth noting that some lenders have set conditions that trigger an early repayment fee that varies with the type and duration of the loan. For example, unsecured fixed interest rate loans with the banks often have far stricter early repayment terms than for their variable rate loans. Lenders with no early repayment fees ultimately provide you with the highest degree of flexibility in how and when you repay your loan. Plenti does not charge any early repayment fees.
Market Insight. The average Plenti borrower takes just 28 months to repay a 3 year loan and 43 months to repay a 5 year loan. That’s a lot of people who are saving thousands of dollars in interest thanks to no early repayment fees.
We all know we should try to avoid penalty fees at all costs — it’s just throwing your money away — but we’ve all missed a direct debit from time to time. That’s why you should always make sure you are aware of any penalty fees and make sure they are not too onerous.
The most common penalty fee associated with loans is the ‘default’, late or missed payment fee, which usually arises where there are insufficient funds in your nominated account on the day a payment is due. Late payment fees range from $20 to $35, however, some lenders will waive the fee if the account is brought up to date within 3 days. It can help to make a budget of your expenses before you agree to the loan so that you know that you’ll comfortably be able to make repayments.
You should also consider opening separate savings accounts to transfer funds into each payday, which are separate from your daily transaction account to ensure funds are always available. When it comes to penalty fees, it is a case of buyer beware. Always take the time to read the loan terms and conditions and look out for any other hidden fees, including ‘new age’ penalty fees like charges to receive paper statements.