What is debt consolidation?
What is debt consolidation? Simply put, it is the transferring of all your outstanding existing debts into one single debt with the help of a personal loan. If you’re juggling multiple debts – be it credit card debt, loans, or household bills – then you may want to look at consolidating your debt.
Taking out one loan to pay off all your debt not only helps you to manage your finances, but it can also give you a lower interest rate and a better chance of becoming debt-free.
What is debt consolidation?
Debt consolidation means combining all your existing loans, credit card debt, or other bills into a single loan.
Having one consolidated debt gives you the possibility of paying just one set of fees with a single interest rate, potentially helping you to pay off your debts faster. When you apply for debt consolidation, you are also open to lower interest rates and the ability to make early repayments.
There are several ways you can consolidate your debt, but one of the most common is through a personal loan. In fact, debt consolidation is one of the most popular motivations for taking out a personal loan across all Australian demographics.
Consolidating debt with a personal loan
Consolidating debt through a personal loan is a good option for paying off multiple existing debts. One of the main benefits of a debt consolidation loan is that they typically carry a fixed term and lower interest rate, meaning you know exactly how much you owe in repayments and a clear indication of when you can be debt-free.
A debt consolidation loan is a type of personal loan, in fact, it works the exact same way. That is, you borrow a certain amount of money from a lender and then agree to pay it back with interest over an agreed loan term.
You can use a debt consolidation loan to pay back several types of debt, simultaneously. This includes:
- Credit card debt
- Store cards
- Hire purchase debt
- Car loans
- Medical bills
- Rent owing
- Utility bills (including mobile, internet, electric, gas, cable, etc.)
- Personal lines of credit
- Income taxes
- Bank overdrafts
To benefit from a debt consolidation loan, you generally have to have a good credit history. Most lenders will take your credit score in to account when calculating your loan term, fees, and interest rate. Generally, the better your credit score the better your interest rate will be.
Debt consolidation loans have a benefit over other forms of finance such as credit cards since they have lower interest rates – helping you to reduce your total debt and pay it off faster.
In order to make a debt consolidation loan work for you, it’s important to make sure that you will be paying less than your current loans. Before applying for a debt consolidation loan, compare the interest rate for the new loan against your current loans, fees and interest rate.
At RateSetter, your loan term, fees, and interest rate are determined by risk-based pricing. We will look at a range of factors including your credit history to provide you with a personalised interest rate. For an accurate estimate of the overall cost of your debt consolidation loan, we recommend completing our online quote tool.
How to apply for a debt consolidation loan
After you have compared personal loan rates and established that a debt consolidation loan will benefit you, you can start the application process online.
Applying for a debt consolidation loan is a simple, straightforward process.
At RateSetter, you can start your online application whenever, wherever – all you need is an internet connection and your proof of identity documents on hand.
During your online process, we will need to verify your income, expenses, and liabilities. You will also need to connect your bank account so that we can deposit the loan into your account upon approval.
For debt consolidation loans, we will also require you to share additional information and documents regarding the credit cards or loans you’re wishing to consolidate.
Upon completion of your application, we will then assess the information you have provided and look for evidence of how suitable a debt consolidation loan is in your situation. This includes reviewing:
- Your employment stability
- Your current income
- Your expenses
- Your repayment history
- Your credit history
Once approved for a debt consolidation loan, you will be provided with a single loan to replace multiple debts. This means you’ll have one loan to repay with the benefit of lower monthly repayments and a single, competitive interest rate – enabling you to clear up your debt and start saving sooner.
Debt consolidation is a great option for simplifying your finances and getting back on your feet. If you find you’re struggling to pay off multiple debts, then find a debt consolidation that works for you by getting started with RateSetter’s award-winning personal loans.
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.