Consolidation in time of heavy indebtedness

by AB06 Feb 2018
Debt consolidation is gaining more attention as Australian households face mounting debts.

As the country's household debt-to-income ratio hit almost 200% and total household debt reached a record $2.4trn this year, simplifying repayments and taking control of one's debt are becoming important topic areas to discuss with clients.

While the idea of combining clients’ debts into one new loan at a lower rate seems easy to sell, Simon Frost, manager of residential operations at non-bank lender Liberty, said it is important to make sure a debt consolidation product is not unsuitable for a borrower before recommending it.

Liberty offers debt consolidation solutions for a broad range of income types, including self-employed and pay-as-you-go clients, as well as different verification types – full doc, low doc and no doc.

“As a responsible lender, we always need to ensure that any lending is not unsuitable for a customer and that they can afford their loan without substantial hardship,” Frost said.

Bundling loans into a single repayment is particularly helpful for borrowers with multiple debts at multiple interest rates, said Carmel Mansfield, business development manager at Princeville Credit Advocates. Getting a lower interest rate in a single repayment generally allows borrowers to save money and clear their debt faster. 

However, Mansfield cautions borrowers to consider whether they are 100% going to get a debt consolidation loan successfully if they apply for one. 

“If they apply for debt consolidation and don’t get it, it will be listed as an enquiry, which will further impact their ability to get finance and consolidate finance in the future,” she said.

“If they have black marks on their credit file, they are very likely to get knocked back or have to get a loan with a higher interest rate.” 

She also reminded borrowers to calculate the amount they will pay under their current financial options against the amount they will pay under a new product.

Frost said there may be situations where Liberty can offer no limit on the number of debts to be consolidated. It may also offer the option of cash-out if it suits the applicant’s circumstances. Before these options can be offered, Liberty needs to ensure a loan is suitable for a consumer and puts them in a better position than they were in previously.

A typical example the lender sees around this time of year is a home owner applicant who has incurred some credit card debt and has a car loan. This type of borrower often reaches out to their bank to explore debt consolidation, only to find out that it is not an option. 

“In this situation, a decrease in the total monthly payments as well as a decrease in the weighted average interest rate can assist the customer in the long term. By doing a Liberty debt consolidation, the applicant makes one easy payment per month, which puts them in a better position than before,” Frost said.

Liberty offers a maximum LVR of 95% and can capitalise the risk fee for refinance and debt consolidation loans with the ability to apply loan splits and a redraw option. 

Its broker business partners get direct access to its underwriting team, with whom they can discuss any application and together work through solutions for their clients.

Mansfield’s most critical piece of advice for people dealing with debt is to be very aware of their current situation. As simple as this may sound, many do not know their debt situation and do not bother to regularly look at their credit cards, mortgages and other loans to see where they are at, she said.

“It is typically much easier for people to stay the same and stay with the same lenders instead of making sure they are looking after themselves and getting their finance at the cheapest rate possible,” Mansfield said.

When borrowers do take stock of their debt situation and decide to get help through refinancing, it is important for a lender to assess a few areas when considering their application, Frost said. 

“There are a few key aspects that we start with: firstly, we want to understand what our customers are trying to achieve; secondly, what is their current situation; and thirdly, what is going to change going forward?”