Many of us accumulate multiple debts in our lifetimes and struggle with the challenges of different repayments and interest rates. There’s a lot to keep track of. According to the Australian Bureau of Statistics, the average Australian household debt grew by 7.3 per cent to $261,492 from 2021-22. As the cost of living crisis causes an increasingly large number of adults to struggle to make repayments, it may be tempting to ask “what about debt consolidation as an option? And do debt consolidation loans hurt your credit?”
Debt consolidation is a strategy that combines all your existing debts (e.g. personal finance loans, car loans and credit card debt) into a single loan with one monthly payment. The goal is to condense all existing obligations into one debt with a lower interest rate, reducing the amount of cumulative interest you pay over time.
Of course lenders will look at your credit score to assess your suitability. A high credit score means you’re generally more likely to be approved. If your credit score is low, you’re more likely to be knocked back or at the very least saddled with a higher interest rate. But what about in reverse: do debt consolidation loans hurt your credit and undo all the hard work you’ve put into paying off your debts on time?
As loan brokers with high levels of experience in debt consolidation, Time Home Loans can take a close look at your financial situation and determine whether debt consolidation loans are right for you. Read on for the pros, cons and impact on your credit score.
Do debt consolidation loans hurt your credit?
If you have a low credit score, you might see debt consolidation as outside the realm of possibility anyway. But lenders can still decide to approve a debt consolidation loan. You’re just more likely to end up with a higher interest rate.
Do debt consolidation loans hurt your credit after you’ve worked so hard to achieve a good score? While taking out a debt consolidation loan may temporarily reduce your credit score, making on-time payments will bring it back up again.
How debt consolidation affects your credit score
When you take out a new credit loan, your chosen lender undertakes a credit check that appears on your file. If you’ve previously applied for multiple other lines of credit, these can add up on your file and result in a temporary lowering of your score. The good news is that paying your debts on time not only leads to freedom from debt eventually, it also improves your credit score.
If you don’t pay this new debt, the consequences can be serious. You may end up being pursued by debt collectors, end up in court or lose your house if you’ve refinanced your property to consolidate your loans. It’s important to speak to a financial expert about a payment plan you can afford and speak to a financial expert if you run into any trouble.
Debt consolidation: pros and cons
Debt consolidation doesn’t get rid of your debt. It just makes it easier and often more affordable to deal with. Some advantages and disadvantages include:
Pros
Savings
The key is a debt consolidation loan that lowers the total amount of money you’re paying on a weekly, fortnightly or monthly basis. This is particularly useful for credit card debt, which tends to be very high-interest.
A simpler process
Your payment terms are fixed and you know exactly when your debt will be paid off, making it easier to manage.
Cons
Requirements
Depending on the lender, you may need good credit or collateral to apply for a consolidation loan.
Additional fees
Some consolidation loans come with origination fees or other upfront costs.
Do debt consolidation loans hurt your credit? No, but they’re not for everybody and certainly not a quick fix. It’s important to discuss your options with a financial expert to find out if debt consolidation or another option like debt management plans or credit card refinancing is a preferable option for you.
Debt consolidation loans with Time Home Loans
As Brisbane-based loan brokers, Time Home Loans can make the process of streamlining your finances through debt consolidation even easier. We can help you refinance your home loan so you’ll be paying off all of your debts through one consolidated loan with a lower interest rate.
With our extensive experience in personal finance, we can look at the best option for you and come up with a solution that protects both your credit score and valuable assets like your home.
With our 100% client-focused approach, Time Home Loans navigates the solution that’s best for you, not best for the lenders. We know which lenders have the products that meet your needs.
Whether you need a more detailed answer to the question “do debt consolidation loans hurt your credit?” or you’re ready to begin the refinancing process, contact Time Home Loans to book your own personal lending experience.