Defaults and debt consolidation

How defaults can impact your debt consolidation

Several estimates show that more than 30% of all working people in Australia have some type of default on their credit file. Apart from finance defaults for personal loans, credit cards and mortgages, this estimate includes utility bill defaults (such as phone bills and electricity bills), and fines from other service industries such as gym memberships and video stores.

Applying for a loan whilst having a default on your credit file will considerably reduce loan application success. Most financial institutions will reject a loan application just on that basis alone, regardless of income and the fact that the loan repayments could be easily afforded.

What options are there for debt consolidation? If a default is a small one and it is for a utility bill, enquiring with your current bank (financial institution) may produce a positive result. Remember that if you apply for a debt consolidation loan and it is rejected, it will be noted on your credit file which, in turn, will further reduce your chances to obtain a loan. If you do have defaults you should not formally apply for a loan or debt consolidation but rather first enquire informally about the likelihood of your loan being approved. This means that a broker should not make a credit file check at this stage, but will be able to confirm whether the loan can proceed before a formal application is lodged.

For example, if you tell a finance broker that you only have a $100 phone bill default (paid) and he confirms that he has a lender who will provide loans for people with small defaults, you should apply formally for the loan. The broker will then check your credit file formally and, if the information you supplied is correct, you should obtain a loan. On the other hand, if the broker finds out that you have additional defaults, your loan application will most likely be rejected. This loan application will have a negative impact on your credit file. If you applied 3-4 times without success within the last 6 months the next application will, by default, be rejected.

Those with several defaults on their credit file will find it very difficult to obtain any type of finance. If difficulty with loan repayments is also experienced, a debt agreement is probably the best option.

One of the better ways to consolidate your personal loans and credit cards is to include them into your existing mortgage. You must have enough equity in your home to be able to consolidate your other loans into your mortgage. This means if your mortgage is $250,000 but the value of your home is $400,000 you would have $150,000 equity in your home. In this example you could consolidate up to $100,000 of your personal loans and credit cards into your mortgage.

Consolidating personal loans and credit card debt into your mortgage can work for people with defaults as well, however, in this case, the mortgage interest rates will be higher than usual.

Debt consolidation is an excellent way to improve your finances, providing that you select the option best suited to your financial situation. For more information contact one of our debt consolidation consultants.

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