Loan Consolidation (or debt consolidation) is a phrase used so often and yet one of our most FAQs is “What is Loan Consolidation?”
We have put together a quick explainer video to help;
The Cambridge Dictionary defines ‘consolidate’ as a verb:
- To become stronger and more certain;
- To combine several things so that they become more effective, or to be combined, in this way
When talking about money, loan or debt consolidation is the process of combining several debts together, usually achieved by applying for a new loan.
The new loan needs to be sufficient to pay out all other debts, thereby “consolidating” the outstanding loans, bills, cards and debts into a single loan.
The general consensus is that debt consolidation has several positive outcomes;
- One account
- One interest rate
- One repayment
As mentioned, the mechanism to consolidate debt requires a new loan and this is not always clear to those who want “debt consolidation”.
You will need to meet the lender’s criteria in order to be approved for a new loan. Each bank or lender will have slightly different criteria, however, the decision to approve or decline the loan is normally impacted by the following factors;
- Your credit file
- Capacity to repay
- Repayment history
- Stability in address
- Stability, length and type of employment
- Size of the requested loan
Your Credit File is now more comprehensive than ever! The type of information it contains is;
- Name, DOB, address history
- Most recent employer
- Any adverse credit listings, such as defaults, court judgements, writ/summons or Insolvency action
- Comprehensive Credit Reporting; a repayment history to show payments made on time / late / missed
- All credit applications for last 5 years (regardless whether taken out or not)
Most of the above is obvious and easy to see how it would impact your loan application however let me address the last two items;
Comprehensive Credit Reporting (aka Positive Reporting) – this is a relatively recent introduction to your credit file.
(CCR) changes the way credit information can be shared by lenders for the purpose of assessing credit. The result is more data, more often – which provides a more complete picture of a customer’s credit commitments.
Historically, information on an individual that could be shared by lenders was limited to credit applications and credit defaults – known as ‘negative’ credit reporting. The change in legislation has opened up additional information about the accounts individuals currently have and how well they meet their repayments – known as ‘positive’ or ‘comprehensive’ credit reporting.
The change, which began in March 2014, brings Australia in line with the vast majority of the rest of the developed world.
- Source; Veda Advantage @ veda.com.au (now Equifax.)
All credit applications for last 5 years;
This is also a very important factor when a lender is assessing your credit worthiness; A high frequency of applications within a short space of time or the type of lender you are applying to can have an effect on how much a credit risk you are viewed as; For example, consistent or repeated payday loan applications could be viewed as living from pay-to-pay, therefore a greater risk to default should an unexpected expense crop up.
Your capacity to repay is crucial as the bank must demonstrate the concept of “responsible lending”, i.e. not lend you money you cannot afford to repay. In order to do this an assessment will be carried out of your income against regular living expenses as well as other loans or credit facilities which you are paying out. Just covering these expenses is not enough. Each lender will have its own rules on how much surplus, or buffer, you need over and above all your outgoings to allow for sudden expenses and inflation.
Your repayment history is your proven track record; if you can show previous loans have been conducted well then it will go in your favour when applying for a new loan.
Your address and employment history forms part of the decision process because instability in these areas can raise doubts;
- If you are frequently changing jobs, is it due to unreliability?
- If it is a new job, are you on probation?
- If employed casually or on contract, how will you repay the loan if your hours are cut or contract finishes?
- If you frequently change address, is it due to unpaid rent?
Unsecured / Personal Loan vs Secured Loan
Debts which are unsecured (or personal) are those there the loan is not attached to an asset. Typical examples are personal loans, credit cards etc.
A secured loan does have an asset attached; eg a mortgage is secured on the property or car loan secured on the car. The loan is “secured” against the asset, meaning that in the event of continued non-payment, the lender has the legal right to repossess the asset, sell it, and apply the sale proceeds to what you owe. Quite often, there may still be a residual debt after an asset has been sold and in this event, the remaining debt is now classified as ‘unsecured’.
A debt consolidation loan could be secured or unsecured, depending on the lender’s decision. Typically if the loan is of a large amount, a security asset is required.
If you are interested in consolidating your debt you should discuss your circumstances with your bank or finance broker. Unfortunately, debt consolidation is not always possible. If you are struggling with debt or find yourself unable to maintain all the different repayments the first step should always be to talk to your Creditors. Remember: if you do not tell them you are struggling, how will they know? Non payment is likely to be viewed as wilful or forgetful rather than unable.
Your Creditor(s) can assess whether they are willing to consolidate any debts. If not, you can request to discuss hardship arrangements (you will need to do this with each lender). Hardship, if granted, can provide a period of temporary relief (normally 3 months) in order to assess your debt solution options. During the hardship period you may be required to still make reduced repayments so it is important that you understand exactly what the terms of your hardship arrangement are. To request hardship relief, call your bank or lender and ask for the “hardship team”. Each lender will have their own criteria as to what constitutes hardship however typical examples might be unemployment/redundancy, hospitalisation/severe illness, death in the family, etc. Note: hardship is normally only accessible once in every 12 month period, per account. An application for hardship will be noted on your record with that lender and may prevent further lending with them for 6 – 12months.
Once the hardship period has been exhausted (or declined in the first place) you will need to resume normal repayments ( and possibly catch up arrears). If this is not possible, then you will need to consider other options to avoid legal and recovery action.
Need debt help?
Life After Debt® can provide a free, no obligation assessment of your circumstances and available options; One option Life After Debt specialises in is called a Part IX Debt Agreement. This is a means to freeze the interest and combine all unsecured debt into one manageable repayment via a negotiation with your Creditors without taking out a new loan. It is a very serious step and also eligibility criteria; the team at Life After Debt® can provide guidance on whether you qualify and if this option is appropriate for you. If you are simply unable to repay your debts, and you believe this will be unchanged for some time, you may wish to consider your options under Bankruptcy. https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts