Category: Articles

Consolidating debt

Consolidate your loans by combining your pre-existing unsecured debts with a single home loan or personal loan.

As a result of debt consolidation, you only have one monthly repayment, which may increase your ability to service your commitments. Also, depending on your circumstances, the interest rate for a consolidation loan may be significantly less than what you are paying at present – especially if your present debt relates to a credit card or a buy-now/pay later purchase card.

The risk of lending to people consolidating more than 3 debts is much larger than the risk associated with a standard purchase or refinance application. As such, for those considering consolidating 3 debts or more, or greater than $10,000 worth of debt in aggregate, the following tips & tricks should assist in helping you achieve your goal as cheaply & quickly as possible:

  1. Don’t lodge multiple applications (AKA don’t shop around)! The key to getting the best deal is to research the market without formally applying to multiple lenders, or to use a Credit Adviser to do this for you. If you personally make multiple applications you will lower your Vedascore for a period of approximately 12 months. Without wanting to bore you with jargon, the reason behind this relates to the lender’s perception of you being a likely desperate applicant (i.e. it’s an instant red flag). We list this point in the top position as it is the most frequent reason for the knockback of otherwise creditworthy applicants.consolidation
  2. Get a free copy of your credit file or check your Vedascore before making any application for finance. If your score is under 350, or you have unpaid defaults – it will be unlikely that you will get approved by any lender unless you own a property or unencumbered vehicle. If you are concerned about a creditor damaging your file, you may wish to invest in Veda’s Secure Sentinel monitoring service. It also provides you insurance and services to help offset the costs of identity theft & credit fraud.
  3. Start ASAP. Whatever you do, don’t leave the application to the last minute. Seriously. The advertising you see on TV and the internet about instant approvals and same day payouts of your other debts is highly optimistic at best. Such approvals are reserved the top 20% of borrowers unless the finance is being provided to you at a significant cost (for example, payday lenders can provide extremely fast approvals, but your effective rate of interest will likely be between 30%-400%p.a.!). As such, if your plan is to do the refinance as cheaply as possible and you know your credit is not excellent, the more time you give credit assessors and your existing creditors to talk, the better your chances of a cheap approval are.
  4. Consolidate your debts before taking on new debts. Why? This is because borrowers with significant numbers of unsecured debts to different creditors are often not living with a sustainable budget. That is, you are better off owing $20,000 to one lender, than you are owing $20,000 to four lenders in the eyes of a future credit provider. This is important if you want to borrow cheaply whilst owing that money, for example to buy a home.

For those considering a debt consolidation using their home loan, the following points will come in handy for you:

  • Maximum 90% LVR.
  • As a rule of thumb, a maximum of four existing loans, counting the existing home loan being consolidated. More loans can be considered on an ad hoc basis but the criteria is highly selective unless you are below 60%LVR.
  • Repayment history for the total of your debt should not reflect late payments, missed payments, over limits or arrears fees in the past six months. If it does, there will be options for you, but unfortunately not at the cheapest rates on the market.
  • Criteria for lending beyond 80% LVR will become much more difficult to satisfy or more costly due to the involvement of a Lender’s Mortgage Insurer (and the associated LMI premium costs). As such, if you suspect you are on the cusp of an 80%LVR debt consolidation, don’t let your interest snowball any further – the hassle of dropping everything and acting today will pay-off in the reduced refinance costs and difficulties.
If you’d like further info, or wanted to learn more about your debt consolidation options, contact a Naritas Credit Adviser today on 1300 558 887 or chat live now online.