How to consolidate debt

Debt consolidation is one of the most common reasons why people take out a personal loan. In fact, one of the most common types of reasons for those getting a personal loan for debt consolidation is credit card debt.

By consolidating your debts, you are helping to better manage your repayments – allowing you to get out of debt faster.

What is debt consolidation?

Managing multiple debts can be stressful. If you’re struggling to balance your debt repayments and wondering how to consolidate debt to release the burden, you’re not alone!

Debt consolidation (also known as refinancing) allows you to bring all your personal debts (loan, credit card, mortgage repayments, bills, etc.) into one single debt. You do this by taking out a personal loan or a debt consolidation loan

Rolling all your existing debts into a new loan can help you manage your repayments easier and give you a clearer picture of your financial future. It also works out as a cheaper solution to repaying debt, since you no longer have multiple interest rates and fees across multiple loans. 

A debt consolidation loan helps you to pay off all your debts simultaneously at a more competitive interest rate. In fact, a debt consolidation loan typically attracts a lower interest rate than you would receive with a credit card. It also reduces your risk of missing repayments or failing to make payments, since they offer a consistent repayment schedule while also allowing you to make early repayments. This may assist you in paying off your debt faster, helping you save in interest and permitting yourself to reach a position where you’re finally free from debt.

How to consolidate debt with a personal loan

A debt consolidation loan works just like a personal loan. That is, you borrow money from a lender and then pay it back with interest over an agreed loan term. 

Before thinking about consolidating your debt, it’s important to determine whether you can afford the repayments of a debt consolidation loan. Some questions to ask yourself include:

  • What are my current monthly repayments? Check your credit accounts and bank statement to ascertain exactly how much you pay each month to make sure that you won’t end up paying more with a debt consolidation loan. 
  • How much interest am I currently paying? If the debt consolidation loan attracts a lower interest rate and fees than you’re currently paying, then it may be a good option to explore. 
  • Am I eligible? Different lenders will have different eligibility requirements for taking out a debt consolidation loan. If you want to find out how to consolidate debt and if you’re eligible, ask the provider directly. 
  • Do I have a good credit history? Most lenders will factor in your credit score when assessing your eligibility to qualify for a debt consolidation loan. Make sure that you have a good credit score to improve your chances of securing the best loan type and interest rate for your current financial circumstance.
  • Is the lender reputable? Some financial companies may advertise a ‘get out of debt fast’ scheme no matter how much debt you owe. This is unrealistic and may cost you even more money. Always check that the credit provider is licensed before applying for a debt consolidation loan.

Applying for a debt consolidation loan is easy. At RateSetter, you can start the process online.

Why you should settle your debt with a debt consolidation loan

The key benefits of streamlining your debt with a debt consolidation loan, include:

  • Better financial management. Having all your debts rolled into one makes it easier to manage your finances.
  • A potentially lower/better interest rate and fees
  • A realistic timeline outlining when repayments are due and when you’ll be debt-free
  • The ability to make early repayments, potentially helping you to get out of debt sooner

Consolidating your debt with a personal loan gives you a more realistic chance of paying off your debt. Unlike a credit card where you have to make minimum repayments, a personal loan gives you set monthly repayments that include both the loan amount and interest. It makes it much easier to budget and eases the stress that comes with not knowing when you’ll break free from financial debt. 

With a debt consolidation loan, you can repay a number of debt types, including:

  • Credit card debt
  • Store cards
  • Hire purchase debt
  • Car loans
  • Medical bills
  • Rent owing
  • Utility bills
  • Personal lines of credit
  • Income taxes
  • Bank overdrafts

At RateSetter, our debt consolidation loans and interest rates are completely tailored to you. We use risk-based pricing to set the overall cost of your loan, providing you with a personalised interest rate. The better your credit history the better your interest rate will be. We also don’t charge any fees for early repayments, meaning you’ll be rewarded with lower interest repayments. 

For an accurate estimate of the cost of your debt consolidation loan, we recommend completing a RateEstimate prior to applying. 

Sebastian Paulin
Sebastian has over 12 years experience in consulting, marketing and finance. He has worked with Australia’s largest banks and emerging fintechs across lending, investing and insurance. Sebastian has a Bachelor of Commerce and Bachelor of Laws with Honours.

How do I get a personal loan?

The first step in applying for a RateSetter loan is to request a RateEstimate. Your RateEstimate is an initial assessment of your eligibility to apply for a loan with RateSetter. It provides you with the estimated fees, charges and interest rate that may apply to your loan, taking into account a number of factors including your proposed loan term, amount, purpose and personal credit history

Requesting a RateEstimate won’t impact your credit score and there’s absolutely no obligation for you to proceed with a loan application. It’s free, secure, and will only take 1 minute to complete. To be eligible for a RateSetter loan you must

  • Be aged 21 or over
  • Be an Australian citizen or permanent resident
  • Be earning over $25,000 per year from a regular source of income that you can demonstrate
  • Have a good credit history

RateSetter will consider a loan application if you are self-employed. Additional credit assessment criteria and requirements may apply.

Are personal loans taxable?

Money received from loans are tax exempt, but they can be subject to income tax under certain conditions. Personal loans are not considered income for the borrower unless the loan is forgiven. In other words, you cannot be taxed on loan proceeds unless the lender grants the borrower a reprieve on paying back the debt owed. This is known as loan forgiveness. In the event a loan is forgiven, the proceeds associated with the original loan are considered “cancellation of debt” (COD) income. COD income can be taxed.

Can I increase my personal loan amount?

If you need a bit extra, you can apply to increase your existing personal loan. You can do this easily by completing an online application. If approved, you’ll continue to have one loan amount and one repayment schedule. Depending on how much your repayments are increased by you may want to extend your loan terms during this process.

Can I take out a home loan after a personal loan?

A personal loan’s impact on your home loan application depends on whether you have the means and ability to meet both repayments. Existing personal loan commitments are factored into your home loan application by repayments being included in serviceability calculations. 

Some lenders use a calculation known as ‘debt-to-income’ (DTI) ratio, which determines the percentage of your monthly income (before tax) that gets eaten up by debt and household expenses. In general, the lower your DTI ratio, the better your odds of getting approved.

What does conditionally approved mean for a personal loan?

When a lender conditionally approves a personal loan it means the loan will stand unless you fail to meet the stipulations the lender lays out. A conditionally approved loan comes after a pre-approval and before a fully approved personal loan

Conditional approval comes once you have provided the necessary documentation to get your loan set up and verified and once an underwriter has dug a little deeper into your circumstance. At RateSetter we pride ourselves on reviewing loan applications in a fast and frictionless manner. It takes just five minutes to submit an application. Once we have received all required documents we aim to provide you with an outcome within 2 business days.
If we approve your loan application, you will have two weeks to accept the loan before your approval is no longer valid. If you need additional time, please contact us.

This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.