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A debt consolidation loan is a specific type of loan designed to combine multiple personal debts into a lower-interest loan. Debt consolidation bundles your debt with your home loan to make one monthly repayment.
Since home loans generally have much lower interest rates than unsecured debts, consolidating these loans could help reduce the amount of interest you pay. That way you can pay the debt back over a longer repayment term at a lower interest rate.
If you are currently paying off debts such as credit cards, car loans or personal loans, consolidating debt with your home loan could help you save money on interest. Some lenders can also add the debt as a separate split with its own separate repayment.
So if for instance, you have a car loan you are paying off with an 8% interest rate you can consider using your home loan to pay off the car. The advantage of this option is that you can repay the debt at your (typically much lower) home loan interest rate instead of what can sometimes be high interest rates on unsecured debts.
If you take out a separate loan you can also choose a shorter loan term, e.g. 5 years, as you would have with the consumer loan, to ensure you do not extend the debt over 30 years.
By consolidating these debts with your home loan, you could repay your debt at a lower interest rate.
The most common types of debt consolidated include:
Credit cards or store cards: These cards come with notoriously high interest rates and with no set repayment term meaning you might never pay it off.
Personal loans: These loans generally come with high interest rates and a set time to be paid back.
Car loans: These loans usually need to be repaid over a period of 1-5 years and can also be consolidated into your home loan.
Other credit accounts: Some lenders give you the option to process more private credit accounts like utility bills for electricity, phones and TV. However, not all debt consolidation loans have these features so it’s best to check with your lender first.
Firstly you need to find out if consolidating debt will put you in a better financial position.
Chat to a Home Loan Specialist to check if you are eligible and if your current loan qualifies.
The first thing we’ll do is check that you have sufficient equity in the property (usually through a bank valuation) and make sure you can repay the new debt.
You’ll need to work out if your monthly repayments after consolidating will be lower than your current repayments. You can calculate your savings by using our handy calculator.
Got a complex situation? A Lendi Home Loan Specialist can calculate this for you and help choose the right consolidation option for your situation.
Before you can start saving, you’ll need to provide a number of documents so your chosen lender can assess your eligibility. These typically include:
Home loan statements for the past year for your existing loan
Recent payslips (last three months)
Most recent group certificate/PAYG summary
Recent loan statements for any other debt
Copy of your most recent council rates notice
ID verification (passport, drivers licence, birth certificate, marriage licence)
Some lenders can make you wait up to 6 months from taking your home loan out before you can increase it. However, depending on the reason, the majority of lenders are now open to it straight away, depending on the strength of the application and purpose of the funds.
If you have existing loans, consolidating debt with your home loan can potentially save you a lot of financial stress. Before you decide to consolidate you need to work out if you’ll be financially better off in the long run.
If you have landed in some financial difficulty, debt consolidation could be a way to free up some extra cash flow to help you manage your other financial obligations such as phone bills, internet and utility bills.
Unsecured debt, such as credit cards, come with higher interest rates (generally between 15-20%), meaning they are more expensive to pay back. Home loan rates usually stand between 3-6% depending on your personal circumstances. That’s why consolidating this personal debt into your home loan can mean you will pay a lower interest rate overall, ultimately saving you money.
Applying for a debt consolidation loan can be a great way to manage debt and budget for outgoing expenses. It can help you avoid defaulting and damaging your credit rating.
Instead of managing multiple debts, you’ll only need to look after one loan with a regular monthly repayment term.
Personal loans and car loans usually need to be repaid in a set period of time. When you consolidate, the repayment term will be the same as the home loan. You need to consider if you want to repay shorter loans such as car loans for this extended length of time.
Want free expert advice? Discuss your options with a Home Loan Specialist.
In order to qualify for a debt consolidation loan, you will need to prove you’re trustworthy and able to manage your finances. The ideal borrower will have the following:
A good credit score
Evidence of regular home loan repayments from the last 6 months
Have paid credit cards/other loans on time for the last 3 months
A history of stable employment and be currently employed for at least a year
You'll need sufficient equity in your property - if your LVR is over 80% you may be incur LMI
If you possess a bad credit history some lenders may consider you an ‘unsafe’ borrower and deny your debt consolidation application.
However, all is not lost. There are a number of Australian lenders who can give loans to people with low credit ratings and there are a few things you can do to help boost your chances of approval.
Review your bad credit: Firstly, you need to know the extent of your bad credit rating. You can obtain a copy of your credit report from any credit report agency for free.
Pay your existing debts on time: You may not be eligible for a consolidation loan now due to your credit history, but if you spend six months making sure that you pay every bill and debt on time, your chances are likely to improve significantly.
Don’t apply for lots of loans at once: Remember not to over apply to lenders as too many credit checks over a six month period of time can negatively impact your credit score. Lenders may suspect that you have been declined for other loans and view you as a risky borrower.
Review your debt position: Once you’re aware of your credit history, make a list of the personal debts you would like to consolidate into your home loan. Separate unsecured and secured loans from each other and check if they have penalty fees. Contact your existing lender to assist you and obtain a written copy if possible.