Debt consolidation loans

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Debt consolidation is the process of combining multiple debts into a single loan or payment. This typically involves taking out a new loan to pay off several existing debts, such as credit cards, personal loans, or medical bills. The goal is to simplify payments by having just one monthly payment instead of managing multiple accounts. 

Debt consolidation can also help lower interest rates, reduce monthly payments, or extend repayment terms, making it easier to manage and pay off debt over time. 

For personalised advice and to explore your options, don’t hesitate to contact Laura. We're here to help you find the best path forward! 

These are some of the reasons why debt consolidation may be considered: 

• Managing multiple debt repayments and struggling to keep track of what is due and when. 
• Getting into a credit trap where all your spare income is used to pay interest, but you don’t have enough left over to reduce your debt balances. 
• You’re paying a very high interest rate on your debts—perhaps you have credit card or cash advance debts, or store credit purchases. 

There are several possible strategies to consolidate debts, which can include: 

• Moving debts to a new credit facility (e.g. a personal loan or mortgage) with a lower rate of interest, or lower fees.  
• Lengthening the term of existing loans (e.g. taking a mortgage debt back out to the 30-year loan term). 
• Changing the repayment terms on an existing loan to interest only, or 
• A combination of these strategies. 

Usually a debt consolidation strategy is implemented to make it easier for you to pay back your debts. However, in some instances, the objective of a debt consolidation may be to improve your cash-flow. 

If you implement a debt consolidation strategy, it’s important to understand that it doesn’t reduce your debts—it just makes your repayments more manageable. A debt consolidation strategy should be implemented in combination with a change to your spending behaviour, so you can work to reduce your overall debt level over time. This should include creating a budget to ensure the debt consolidation measures work effectively and using a budgeting template such as the one available on ASIC’s MoneySmart website ( Budget planner - Moneysmart.gov.au). 

Some of the benefits of debt consolidation are: 

• Simplicity: One loan repayment is a lot easier to manage and more convenient than juggling several different repayments. 

• Savings on interest and fees: Debt consolidation could potentially reduce the amount of interest you pay on high-interest facilities like credit cards and save you money on fees for multiple credit facilities. This may make it easier to pay back your debts. 

• Potential cash savings: This is potentially the biggest benefit of debt consolidation. By consolidating your debt into a loan charging a lower interest rate, you have the potential to save interest on monthly repayments and reduce your overall interest.  

• Lower repayments: Reducing the interest rate and spreading out repayments over time could potentially reduce the monthly repayment amount due.  

• Stress relief: Specialist lenders are available that may lend to you if you have missed repayments on your current debts, or if you have a poor credit history 

•  Higher costs: Long-term interest costs could be higher if you extend the loan term during a debt consolidation program. While it may reduce the size of the repayments in the short term, the overall amount repaid is far greater—particularly if you are consolidating your debts into a home loan which may have a 30-year term.  

Example:  If you take out a $30,000 personal loan with a 15% interest rate over 5 years, you'll pay $12,822 in interest, bringing the total cost to $42,822. 

However, if you add the same $30,000 debt to a mortgage with a 5% interest rate over 30 years, the interest paid over the longer term will be $27,977, resulting in a total cost of $57,977. W

While the mortgage offers a lower interest rate, its much longer repayment period leads to a higher total interest cost due to the longer time interest is charged, even though the monthly payments are lower. 

• Increased credit access: If you’re not careful when consolidating your debts, you could make your financial situation worse. Remember to close your cleared credit facilities. For example, if you roll your credit card balances into your home loan to consolidate your debts, you might be tempted to continue using your credit cards and run up even more debt if you don’t close them.  

• Concentration of risk: Consolidating all your debt into your mortgage means that you have a lot at stake if interest rates rise. We recommend that you take advantage of all available cash to make additional repayments to pay off the refinanced debt as quickly as possible, or to start a savings account to build up a safety net.  

• Using up equity: Consolidating debts into your mortgage can also mean you are using up equity gained through paying down the balance or through an increase in value of the property. This means your returns will be reduced when you sell. Furthermore, consolidating your debts into your home loan can increase your loan-to- value ratio (LVR) above 80 percent. If this occurs, you will be required to pay Lenders Mortgages Insurance (or LMI). LMI can be expensive, so this may affect the savings you receive from refinancing your home loan to consolidate your debts.