Getting out of debt can often feel impossible. It feels even more difficult when interest rates are astronomical, and your paycheck hasn’t moved up in months. 

If this sounds relatable, chances are you’re looking into alternative ways to pay off debt, one of which is consolidation. But what exactly is a debt consolidation loan, and is it worth it? Let’s find out!

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How Debt Consolidation Loans Work

Debt consolidation is the process of taking out a new loan to replace multiple existing ones. You can roll several high-interest debts, such as credit cards, personal loans, and mortgage payments, and replace them with one lower-rate personal loan.

The bottom line? You only have one debt to take care of each month, rather than several. While most debt consolidation payment plans span 1-7 years, you can customise the payment plan depending on your financial situation and preferences. 

Once you’re approved for a debt consolidation loan, the lender will pay your creditors directly. They will gather your creditors’ information and the amount you owe to each of them. 

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Benefits of Debt Consolidation

The benefits of taking out a debt consolidation loan include:

• Lower interest rate. Depending on your credit score and the total debt owed, a lender might give you a lower APR than your current debts.
• Financial control. With debt consolidation, you make only one monthly payment. This makes budgeting and tracking a breeze.
• Improved credit. Taking out a debt consolidation loan can actually improve your credit score, helping you qualify for better loan terms in the long run.

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Fixed vs. variable interest rates

Like any loan, you’ll be charged interest on your consolidation loan. Lenders offer one of the two interest rate types:

Fixed-rate: You’ll be charged a fixed interest rate and a monthly payment for the life of the loan. Fixed-rate consolidation loans make budgeting easier.

Variable rate: This is less common for debt consolidation, but still possible. The interest rate is set by market benchmarks, such as the prime rate. 

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Factors Influencing Your Interest Rate

Lenders use different approaches to calculate your interest rate. But in most cases, the amount of interest is calculated based on how much of your principal loan amount you still owe. Other factors include:

• Your credit score
• Secured vs. unsecured loans
• Special lender fees 

Pro tip? Choose a lender that offers a comprehensive breakdown of the loan amount and the factors that impact your interest rate. Transparency is key to effective debt consolidation.

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Who is Eligible for a Debt Consolidation Loan

Lastly, let’s clarify the eligibility criteria for a consolidation loan. While lenders have varying requirements, make sure you:

• Are 18 years old or over.
• Are a citizen or permanent resident of Australia. Make sure you don’t have any outstanding or unpaid defaults.
• Don’t have a history of bankruptcy.
• Are not part of a court judgment.
• Are free from financial hardship with other providers.
• Have a regular income from active employment.

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