Not all loans are the same. The one that’s right for you will depend on how much you owe and how easily you can pay it back.
It really comes down to finding the one that’s the best for you. So how can you decide which lender to go with and what repayments and loan terms to agree to? First, you’ll need to take stock of your situation and make a few key decisions.
Planning and considering your situation upfront will help when comparing which debt consolidation loan products are available that might really fit your needs, and offer the best value.
1. Loan amount: How much do you really need?
To decide how much you need to borrow, do some research and budgeting to work out how much (approximately) you are going to need to take control of your finances. In the case of debt consolidation, it helps to know exactly which debts you are consolidating to really have a handle on how much money you have outstanding.
It’s smart to only borrow what you really need, but you also don’t want to have to look for additional finance to get on top of bills that might be just around the corner.
2. Repayments: How much can you afford to repay?
This is key for those borrowing for debt consolidation. Now is the time to take a closer look at your everyday budget, (or to create one), to see how much you can realistically afford to put towards repayments. Be sure to give yourself a bit of a buffer; failure to make a loan repayment at any time can cost you penalty fees and won’t do your credit score any favours.
Are you expecting any changes in income in the next few years, changing where or how much you work or perhaps hoping to have a baby? Be sure to build this in.
Whether you receive your income weekly, fortnightly or monthly, you need to know how much you have leftover at the end of each pay period and how this will align with your repayments. It may be worth opening a separate bank account for your repayments and transferring funds for loan payments in on payday so you are never caught out.
3. Loan term: How long will you need to repay?
Divide the planned loan amount by your planned monthly repayment to get a ballpark amount of time you’ll need to repay the loan. For example, Tim calculated that he needed to borrow $24,000 to get on top of his student debt, credit cards and to pay off the rest of his car loan. Based on his salary and existing expenses, he thought $120 per week/$480 per month would be an affordable repayment. This would be $5,760 per year, meaning in 5 years he’d have paid $28,800 — roughly the full amount, accounting for interest and charges.
A longer-term loan might seem attractive as it means lower monthly repayments, however the overall (lifetime) cost of the loan is significantly higher because you’ll pay more in interest, and potential fees. That being said, provided you look for a loan with flexible repayments, you’ll be able to take advantage of any future increases in salary that may allow you to pay down your loan faster without penalty.
4. Loan type: Decide between a secured or unsecured loan
Do you have an asset that you are willing, or able, to put up as security against the loan? Perhaps property, or a new or nearly new car? If you are confident in your ability to repay the loan, a secured loan will get you a better rate and may unlock access to greater funds. Be aware, however, that your asset will be at risk if you can’t make the repayments.
5. Compare: Start to request and examine your personalised offers
Now you know roughly how much you need to borrow, what you can afford as a repayment and how long you’ll need to repay your loan. Next, you can start to plug these values directly into lender or comparison sites to get an estimate of your personalised interest rate and repayments.
Experiment with different combinations, such as different loan terms or repayment amounts and match them against your needs. Need more help deciding? There are many third-party agencies (which don’t sell loans) that both rate and compare a broad range of loans.
Canstar is one of the most established financial comparison sites, and they’ve been comparing products without bias since 1992.
They release annual star ratings for a range of debt consolidation loans from many providers. To do this, Canstar comprehensively and rigorously examines a broad range of loans available across Australia. To come up with an overall score, they award points for:
- Price — comparative pricing factoring in interest and fees
- Features — like the complexity of the application, the time involved before settlement, product management, customer service and loan closure
These are then aggregated and weighted to produce a total score. This means Canstar’s ratings are reputable and transparent, so you can trust the information they provide but still dig deeper if you want to. Other comparison sites can also be useful, however, you should always check around, as some may have a ‘sales’ element, that is, they may receive money for the people that visit their website en route to a particular lender.
So if the best rate isn’t being offered, it may not show up on their comparison. They also have ‘promoted’ or ‘featured’ loans, which they are paid to highlight, even if those loans don’t truly reflect the best value loans on the market.
Another way to get information on your lender and loan is to read feedback from real, verified customers on ProductReview.com.au. You’ll be able to read customer reviews that rate the best debt comparison loan providers and explain what they liked best about their service.
What questions should I ask to choose the best debt consolidation loan?
- What is the interest rate and the comparison rate?
- How do these rates compare to other loans?
- What are the fees and charges? (e.g. upfront, ongoing, early exit)
- What are the terms and conditions?
- Do the loan term and loan amount fit your unique needs?
- Can you definitely afford the repayments?
- Are you comfortable with the lender? Have you checked its reputation and accreditation?
Comparison rates are a good starting point, but you still need to decide what will work best for you. The costs involved in securing the finance are a major factor, but once you’ve shortlisted a few loans that seem similar enough from that perspective, make time for these final checks:
- Are there flexible repayment options? Usually, you can choose between weekly, fortnightly or monthly repayments according to what suits your pay cycle. However, not all lenders offer this; this may or may not matter to you
- Compare a loan’s conditions and fees around making extra repayments and paying the loan off before the end of the term. This can be a great way to reduce the overall cost of your loan, but not if you’ll incur extra penalties
- Can you use the funds for what you need the loan for? You can’t always use the borrowed money for whatever you like. Some lenders don’t allow you to take out a debt consolidation loan for business purposes. Most won’t allow you to pay debts overseas. Debt consolidation loans are usually extremely flexible, however, do make sure your plans match the lender's policies
- What are the options for managing the loan over time? Check and compare how easy the loan will be to manage
The processing of the repayments, changing your personal details, any refinancing requests you may want to explore down the track. The option to manage your account online is often available but not always, and some lenders have more functionality than others. Using direct debit for repayments is common, yet without it, monthly repayments will be much less convenient and you are more likely to be penalised for late payments if you aren’t perfectly disciplined.
By taking stock of your complete financial situation up front, you’ll be confident that you’re moving forward financially. You’ll be better able to compare the different debt consolidation loans on the market and be equipped to choose the one that is best suited to you.