Compare debt consolidation loans

A debt consolidation loan is a type of personal loan that allows a borrower to roll multiple credit products together, such as an existing personal loan, car loan, and maybe a credit card or two. The borrower then has just the one loan to budget for, allowing them to pay down their existing debt in a more manageable way. 

Paying off multiple debts at once might feel overwhelming, but a debt consolidation personal loan could make it a little easier by streamlining your repayments, simplifying your budgeting, and potentially even saving you money.

A debt consolidation loan might be able to help you get your financial situation back on track in more ways than one. For example:

• Consolidating your debts could help simplify your finances, making budgeting and paying your bills more manageable, and easing pressure on your bank account.
• Debt consolidation could reduce the stress of managing multiple loan repayments each month, and reduce the chance of missing payments.
• By rolling your various loans and/or credit card debts into a single account, you'll only have one set of ongoing fees to pay instead of multiple.
• Consolidating your existing loans into a personal loan with a lower interest rate could help reduce the interest charges on each repayment (though you could still pay more total interest over a longer term).
• Consolidating your debt could help you boost your credit score by letting you demonstrate positive credit behaviour over time. This could make it easier to qualify for other loan products in the future.

Some risks to consider before applying for a debt consolidation personal loan, include:

• If you have a bad credit history, it could be harder to get a debt consolidation loan approved, or you may only be approved for a loan with a high interest rate. While this could still help to simplify your budgeting, you may not necessarily save money.
• If a debt consolidation loan has a longer term than your existing loans, it could end up costing you more. This is because paying a debt over a longer period can mean paying more in total interest charges, even if the interest rate is lower and your monthly repayments are cheaper.
• If you get access to a higher maximum credit limit with your consolidated loan, you could be tempted to borrow more money and end up deeper in debt. To keep your loan from costing you more money, you may want to have your debt consolidation loan cover your existing debts only.
• A debt consolidation personal loan may not be the cheapest option available to manage your outstanding debts. Consider what other options you may have, such as a balance transfer credit card, to determine which could save you the most.

Credit products of all kinds will generally influence your credit score, and debt consolidation loans are no different. Understanding the ways in which your credit score could be affected can help you protect your credit file and even work towards increasing your score.

How debt consolidation could hurt your credit score

When you first apply for a debt consolidation loan, the credit provider will perform a hard enquiry on your credit file before your application is approved. If you have other recent enquiries on your file, then there's a chance your credit score could take a hit. 

Also, if you close your old credit accounts when you consolidate their debts into a new loan, this could shorten the overall length of your credit history.  This could cause your credit score to dip, though this may just be temporary. 

However, if the new loan allows you to get on top of your debts and into a better financial position, the benefits in the long run could outweigh any initial hits to your credit score.

How debt consolidation could improve your credit score

If you are diligent with making regular repayments on your new loan and consistently pay down your debt, demonstrating positive credit behaviour, there's a good chance your credit score will see an improvement. The introduction of comprehensive credit reporting means both positive and negative information is now recorded on your credit file, so an increased number of positive credit events can benefit your score.

Building your credit score back up can help you down the track if you want to apply for other financial products, such as a home loan. Lenders typically offer more competitive interest rates to borrowers with good credit scores, who may also have a higher chance of seeing their loan applications approved.

There are several different kinds of personal finance debts that can be rolled into a debt consolidation personal loan, which may include:

• Credit cards: Whether you have multiple credit cards or just the one, credit card debt is a common candidate for consolidation into a personal loan. If you only have credit card debts to consolidate, you could also consider a balance transfer.
• Existing personal loans: You may have one or more existing personal loans, with different loan amounts, interest rates and purposes, that you would like to consolidate with other credit products into a new personal loan. You could also consider refinancing these loans to a low rate instead.
• Car loans: If you're finding it difficult to juggle your car loan repayments with other types of debt, a debt consolidation loan may help to simplify your finances and potentially lead to cost savings, depending on your personal situation. Keep in mind that if your current car loan is secured by the value of your vehicle, it may already have a more competitive interest rate than an unsecured personal loan can offer.
• Debt collection agency debts: If you have outstanding bills or fines owed to a company or organisation, which they have made failed attempts to recover from you, they might pass them on to a debt collection agency. Some credit providers may allow you to consolidate debts held by debt collection agencies with a personal loan.

As a type of personal loan, debt consolidation loans have many different features to consider. Carefully comparing each feature can help you find the right debt consolidation loan for your needs, because what’s best for one borrower may not be what’s best for another.

Interest rate

The interest rate will determine how much you pay in interest charges over the life of the loan. A fixed interest rate will remain the same over the loan term, while a variable interest rate can fluctuate with the market. Choosing a fixed rate could mean simpler budgeting and potentially saving some money if variable rates rise during the loan term. However, you could also potentially miss out on some interest savings if the lender cuts variable interest rates during the term. 

Comparison rate

A lower interest rate doesn’t always mean a cheaper personal loan, because you also need to consider fees. This is where the comparison rate comes in handy, as it includes both the loan’s interest rate and main fees, giving you a better idea of its total cost. Keep in mind that there may also be nonstandard fees that aren’t included in the comparison rate.

Secured vs unsecured

A secured personal loan is secured by an asset, such a car, which is used as collateral for the money borrowed. If you can’t keep up with your repayments, the lender could seize your security instead. An unsecured personal loan doesn’t have an asset attached. Secured loans often have lower interest rates than unsecured loans as lenders consider them less risky. Keep this in mind if you are planning to consolidate a secured car loan with other debts.

Loan term

The amount of time you have to pay off your loan. Personal loans typically have terms of one to five years, but some lenders offer loan terms up to seven years or more. When consolidating existing debts, you may want to avoid a longer loan term than you already have, as it could end up costing you more in total interest charges, even if the interest rate is lower.

Extra features

Different personal loans may offer extra features that could be important to you and how you pay off your loan. Some of these include:

• Extra repayments – One way to pay off your personal loan sooner is to make extra repayments. But while some lenders offer unlimited extra repayments, some may charge a fee, while others may not allow you to make additional repayments.
• Redraw facility – A personal loan with a redraw facility will allow you to 'redraw' extra repayments you’ve made, taking the money back out of the loan. This can be handy if you want to pay less interest on your personal loan through extra repayments, but still want access to this money. Not all personal loans come with redraw facilities, and those that do may charge redraw fees.
• Flexible loan repayments – Some lenders may give you the option to make weekly, fortnightly or monthly repayments, which may better suit some budgets.

Fees

The types of fees you may be charged for your personal loan will differ from one lender to the next. Some of these may include:

• Loan application fees
• Establishment fees
• Monthly fees
• Late payment fees
• Extra repayment fees
• Early repayment fees/exit fees
• Redraw fees

To make your debt consolidation personal loan comparison simpler, RateCity has several tools that may be useful to you:

Personal loan comparison table

RateCity's comparison tables can help you narrow down your personal loan options for debt consolidation. You can use the filters to find choices that may better suit your needs, such as secured or unsecured loans, with fixed or variable interest rates.

Personal loan calculator

RateCity’s personal loan calculator can estimate your repayment amounts based on how much you’d like to borrow, your preferred loan term and interest rate. It can also find the total interest payable and total amount payable on your personal loan, which can help you estimate the total cost of consolidating your debts.

Real Time Ratings™

Real Time Ratings™ is a system that scores personal loans out of five stars, based on their cost (e.g. their interest rates and fees) and flexibility (e.g. approval/funding time, extra repayments, redraw and early exit penalties). Calculated as you use the site to help them stay as up to date as possible, these ratings can give you a better idea of each personal loan’s overall value.

A debt consolidation personal loan can be a helpful tool for some, but there are other options that may be worth exploring. Some of these include:

A balance transfer credit card

Transferring your balance from your existing credit card to a new balance transfer credit card that charges you zero per cent interest on your transferred balance gives you an opportunity to clear your debt without interest charges building up. Keep in mind that the no-interest offer is usually only for a limited time before it reverts to an interest rate that’s often higher than average, so you could be charged a lot on any debt that’s left over.

Accessing your home equity

If you own a house, you could consider refinancing your home loan and borrowing more money to cover the cost of your other debts. Alternatively, you could consider borrowing a lump sum with a  home equity loan secured by your property, and use this to consolidate your debts. Home loan interest rates are generally lower than most credit cards and personal loans on the market, so you could save money in interest. 

However, home loans typically have longer terms than personal loans, which means that you may end up repaying short-term loans over a more extended period. As a result, you may eventually end up paying more in interest charges over time, despite a lower interest rate. Additionally, if you’re unable to manage your debt, there’s a greater risk of losing your home. 

Refinance

You may be aware that you can refinance a home loan, but did you know you can also refinance a car loan or a personal loan? If you're unhappy with your current loan’s interest rates, fees, or features, you could consider refinancing to a lower rate to save money. Just be sure to check the lending criteria before you begin the application process to ensure you are eligible for the loan you are interested in, and factor in any early exit fees and the like when doing your calculations.

Talk to your credit provider

Consider reaching out to your credit provider to see if you can negotiate a longer loan term, or a different payment schedule, to potentially make your repayments more manageable.

Ask for help

Remember that you can access free financial counselling and advice if you are experiencing financial stress. The National Debt Helpline can help you get your finances back on track, and the National Association of Community Legal Centres are not-for-profit, community-based organisations providing free legal help to those who need it most.