If you are looking for a debt solution to reduce your current debt repayments to an affordable level, you will probably be looking for a debt consolidation loan. However the debt solution that you end up with may not be a new loan, rather a debt agreement.
According to media reports in Australia some people sign up to a debt agreement not understanding the difference between it and a debt consolidation loan. In fact some people are actually looking for a part 9 debt agreement loan. This is a clear indication of borrower confusion between a consolidation loan and a debt agreement.
This distinction is made for more than simply educational value. The debt solution that you end up proceeding with may have implications on your credit history which you do not understand.
What is a debt consolidation loan?
A debt consolidation loan can be a new personal loan (secured or unsecured) or a mortgage refinance which allows the borrower to build in all of their expensive unsecured loans into a single cheaper loan facility.
Most people looking for debt consolidation are actually after a personal loan. The problem is that in order to qualify for a personal loan especially one that is unsecured you need to be able to show the lender that you are not experiencing financial hardship. You can afford comfortable your current repayment but would simply like the opportunity to save some money. You have a clean credit history and working. If this is your situation then qualifying for a debt consolidation loan should be easy.
However most people do not look for debt consolidation solutions until things are very tight financially. Perhaps credit cards are close to limit or even a bit over and there may be some loan arrears or defaults. Once you have reached this point – an unsecured debt consolidation personal loan is not on the cards. Lenders only want to offer these product to borrowers who do not really need it.
What is a debt agreement?
A debt agreement on the other hand is not a loan. This is an arrangement under the bankruptcy act of Australia. Applying for a debt agreement is not the same as declaring bankruptcy, however it is completely nothing like talking out a new loan.
A debt agreement application is reflected on your credit report for 7 years. It tells your creditors as well as any other lender in Australia whom you authorize to check your credit history, that you are insolvent – can not afford to meet your current debt repayments.
A debt agreement specialist will contact your creditors on your behalf and attempt to negotiate a reduction to your repayments. Repayments may be reduced by 20%, 30% or even 50% – all depends on the creditors and skills of the negotiator. This means that if your proposal is accepted by your creditors (majority acceptance will tie all unsecured creditors) you can pay a reduced amount for several years without incurring any interest during the repayment term. At the end of the agreement term you should find yourself free of any unsecured debts.
The benefit of entering a debt agreement is that you are possibly allowed to repay only a fraction of your debt in full settlement of the debt.
The cost you bear is the fact that your debt agreement will impact your ability to qualify for further finance during and even after you are discharged. That can mean that for a period of 7 plus years you can not apply for a credit card or a personal loan. Home loan applications may be restricted to lenders who can offer bad credit mortgages.
Why choose a debt agreement over a loan?
You may well ask why someone would choose a debt agreement over a consolidation loan? Well in reality you will need to pay less with an agreement that you will with a loan – however this is not a choice. You either qualify for one or the other – it is not possible to take up a debt agreement if you can qualify for a consolidation loan, because that means that you are not insolvent. Debt agreements are only for someone who is insolvent.