Managing several debts at once can become stressful, particularly when you have different repayment dates, interest rates and fees to keep track of. Credit cards, personal loans, car finance and other forms of credit can quickly become difficult to manage when repayments start taking up a large part of your monthly budget.
This is where debt consolidation may be worth considering. In Australia, debt consolidation allows you to combine multiple debts into a single loan or financial arrangement, giving you one regular repayment instead of several.
But consolidation is not automatically the right solution for everyone. The new loan needs to make financial sense when you consider the interest rate, fees, loan term, repayments and your overall financial situation.
What Is Debt Consolidation?
Debt consolidation is the process of combining multiple existing debts into one new loan.
For example, you might have:
- A credit card balance of $6,000
- A personal loan of $10,000
- Another credit facility of $4,000
Instead of making separate repayments to three different providers, you may apply for a new loan that covers the outstanding balances. Once approved, the existing debts are paid out and you then make repayments on the new consolidated loan.
The goal is generally to make your finances easier to manage and, where possible, reduce the overall cost of your borrowing.
According to Moneysmart, debt consolidation can include combining debts such as credit cards, personal loans, buy now pay later balances and store cards into one new loan. However, it is important to compare the total cost of the new arrangement with your existing debts before making a decision.
How Does Debt Consolidation Work in Australia?
The process can vary depending on the lender and the type of finance you choose, but it generally follows a few key stages.
1. Review Your Existing Debts
The first step is to understand exactly what you currently owe.
Make a list of each debt, including:
- Outstanding balance
- Current interest rate
- Monthly repayment
- Remaining loan term
- Account or annual fees
- Any early repayment costs
Having these figures together makes it easier to determine whether consolidation could actually improve your position.
Moneysmart recommends getting a clear picture of your debts, including balances, interest rates, fees and repayment amounts, before deciding how to tackle them.
2. Calculate How Much You Need to Consolidate
Once you know what you owe, you can calculate the amount required to pay out your existing debts.
For example, if your outstanding balances total $25,000, you may need a consolidation loan of approximately $25,000, subject to the lender’s assessment and any applicable fees.
It is important not to automatically borrow more than necessary. Increasing the amount you borrow can make your overall debt position worse rather than better.
3. Compare Your Finance Options
Not every consolidation loan will provide the same outcome.
You may need to compare:
- Interest rates
- Comparison rates
- Establishment fees
- Ongoing fees
- Loan terms
- Repayment amounts
- Early repayment conditions
- Whether the loan is secured or unsecured
A lower advertised interest rate does not necessarily mean the loan will cost less overall. The comparison rate can help you assess the interest and most standard fees associated with a loan.
4. Apply for the New Loan
After comparing suitable options, you can apply for a consolidation loan.
The lender will generally assess your financial circumstances, which may include your income, expenses, existing debts, credit history and ability to make repayments.
Approval is not guaranteed, and the interest rate offered may differ from an advertised rate depending on your circumstances.
5. Existing Debts Are Paid Out
If your application is approved, the new loan funds can be used to pay out the debts being consolidated, depending on the lender and loan structure.
You then have one new repayment to manage instead of multiple repayments across different accounts.
This can simplify your budgeting and reduce the chance of forgetting individual repayment dates.
6. Focus on Paying Down the New Loan
Debt consolidation only works as part of a broader financial plan.
Once your debts have been combined, it is important to avoid rebuilding the balances you have just paid off. For example, continuing to use credit cards after consolidating their balances could leave you with the new consolidation loan plus additional credit card debt.
The objective should be to create a manageable repayment plan and work towards becoming debt-free.
What Types of Debt Can Be Consolidated?
The debts that can be combined depend on the lender and the specific finance product.
Depending on your circumstances, consolidation may be used for debts such as:
- Credit card balances
- Personal loans
- Store finance
- Buy now pay later balances
- Other eligible consumer debts
Some borrowers may also consider using home loan refinancing or available home equity to consolidate unsecured debts. However, this needs careful consideration because it can turn unsecured debts into debt secured against your property.
Moneysmart warns that using your home or another asset as security can put that asset at risk if you cannot meet the new repayments.
What Are the Benefits of Debt Consolidation?
Debt consolidation can offer several potential advantages when the numbers work in your favour.
One Regular Repayment
Instead of keeping track of multiple lenders and payment dates, you may have one regular repayment.
This can make household budgeting simpler.
Potentially Lower Interest Costs
If your existing debts have relatively high interest rates and you qualify for a consolidation loan with a lower overall cost, you may be able to reduce the amount of interest paid.
However, this should always be calculated over the entire loan term rather than based only on the advertised interest rate.
Easier Budget Management
Multiple repayments can make it difficult to understand how much money is leaving your account each month.
Combining eligible debts can give you a clearer picture of your regular repayment commitment.
A Clear Repayment Structure
A consolidation loan may have a defined loan term and repayment schedule. This can make it easier to plan how and when the debt will be paid off.
What Are the Risks of Debt Consolidation?
Debt consolidation isn’t automatically a way to save money.
One of the biggest mistakes is focusing only on reducing the monthly repayment without checking the total amount you will pay.
A Longer Loan Term Could Cost More
A consolidation loan may reduce your monthly repayment because the debt is spread over a longer period.
However, paying debt over a longer period can result in more interest being paid overall.
For example, moving a short-term credit card balance into a much longer loan may reduce the monthly payment but increase the total cost of borrowing.
Moneysmart specifically recommends checking whether a longer loan term could result in more interest and fees over time.
Fees Can Reduce the Savings
Before consolidating, check whether there are costs associated with:
- Establishing the new loan
- Paying out existing loans
- Switching lenders
- Valuations or legal work, where applicable
- Other ongoing account fees
These costs should be included when comparing your existing debts with the proposed consolidation option.
Your Home Could Be Used as Security
If unsecured debts are consolidated into a loan secured against your property, the consequences of missing repayments can be more serious.
Your home or other secured asset may be at risk if you cannot meet the new loan obligations.
It Doesn’t Remove the Underlying Debt
Debt consolidation changes how you manage your debt; it does not make the debt disappear.
If spending habits remain unchanged, you could potentially accumulate new debt after consolidating your existing balances.
When Could Debt Consolidation Make Sense?
Debt consolidation may be worth considering when:
- You have several debts with different repayment dates.
- Your existing debts have relatively high interest rates.
- You can qualify for a more suitable loan.
- The new loan has manageable repayments.
- The total cost is lower or provides a clear financial benefit.
- You have a realistic plan to avoid taking on additional unnecessary debt.
The key is to look at the complete financial picture rather than choosing an option simply because the monthly repayment appears lower.
When Might It Not Be the Right Choice?
Consolidation may not be suitable if the new loan has higher costs, significant fees or a much longer repayment period.
It may also be unsuitable if your financial circumstances mean you cannot comfortably afford the new repayments.
Before refinancing or consolidating, it can be worthwhile discussing your situation with your existing lenders. Depending on your circumstances, hardship arrangements, repayment changes or other options may be available. Moneysmart also recommends considering alternatives such as changing loan arrangements, balance transfers or speaking with a financial counsellor.
How a Finance Broker Can Help With Debt Consolidation
Understanding your options can be difficult when you are already managing multiple financial commitments.
A finance broker can assess your circumstances and help you compare available lending options based on your borrowing needs. They can also help explain different loan structures, repayment terms and costs so you can make a more informed decision.
At JH Finance Group, the focus is on helping Australians make informed finance decisions that suit their individual circumstances. If you’re considering debt consolidation, getting your existing debts and financial goals reviewed can be a useful starting point.
The right solution will depend on your income, expenses, existing debts, credit profile, available assets and the lending options you qualify for.
Final Thoughts
Debt consolidation can simplify multiple repayments and may reduce borrowing costs when the right loan is selected. However, a lower monthly repayment does not always mean a lower overall cost.
Before making a decision, compare the interest rate, comparison rate, fees, loan term and total repayments. Also consider whether the new arrangement could put your home or other assets at risk.
If you’re considering debt consolidation in Australia, JH Finance Group can help you assess your finance options and understand what may be suitable for your circumstances. Taking the time to review your options now can help you make a more informed decision about managing your existing debt and planning for your financial future.
