Managing several debts at once can mean keeping track of different balances, interest rates and repayment dates. It can also make it harder to see what you’re paying altogether.
That’s where debt consolidation comes in. As the name suggests, it means combining several existing debts into one new loan, allowing you to make one regular repayment to one lender.
According to ASIC’s MoneySmart, debts that may be consolidated can include credit cards, personal loans, store cards, Buy Now, Pay Later (BNPL) accounts and car loans, depending on the lender and the loan.
There are lenders in Australia, including Handy Finance, that offer dedicated debt consolidation loans, allowing borrowers to consolidate eligible debts into a single loan.
So why do people consider bringing several debts together? There are a few common reasons.
Managing several repayments
Having multiple debts can mean several repayment dates to remember, each with its own balance and interest rate.
Consolidating eligible debts into one loan can mean making a single regular repayment instead. For someone managing several accounts, having just one repayment to keep track of can make the day-to-day side of managing their finances simpler.
However, bringing debts together doesn’t make the underlying debt disappear. The balance still needs to be repaid under the terms of the new loan.
Simplifying your finances
Sometimes the appeal is simply having fewer things to keep track of.
You might have a credit card, personal loan and other debts being paid from the same household budget. Each one can have different repayment dates, fees and terms.
A consolidation loan can bring eligible debts together under one set of loan terms. That can make it easier to see how much you owe, when repayments are due and when the new loan is scheduled to be paid off.
Looking at a different interest rate
The interest rate is another reason someone might consider consolidation. If some existing debts have higher interest rates, a new loan with a lower rate could reduce the interest charged on the consolidated balance. But the rate alone doesn’t tell you what the loan will cost overall.
MoneySmart points out that a consolidation loan can end up costing more if the new loan has higher fees or a longer repayment term. For example, a lower rate combined with a much longer loan term could mean paying more interest over time.
That’s why it helps to look at the total cost, not just the advertised rate.
Having a set repayment structure
Different debts can come with different repayment agreements. A consolidation loan brings the debts under one new loan agreement, with a defined repayment schedule. That can make it easier to see how much you need to repay each period and when the loan is due to finish.
The loan term still matters, though. A longer term can reduce the size of each regular repayment, but you may pay interest for longer as a result.
Seeing the full cost of your debts
Consolidating your debts can also be an opportunity to put all the numbers in one place. Before applying, MoneySmart suggests listing each existing debt, including:
- The outstanding balance
- Current interest rate
- Fees and charges
- Remaining loan term
- Current repayment amount
You can then compare those figures with the proposed consolidation loan. Looking at both sets of numbers can show you whether the new loan actually changes the overall cost and repayment structure in a way that works for your budget.
Creating more room in the budget
Depending on the interest rate and loan term, consolidating debts may result in a lower regular repayment.
That can make a difference to someone’s monthly budget, but there’s an important trade-off to understand. A lower repayment can come from spreading the debt over a longer period, which may mean paying more interest overall.
In other words, the size of the regular repayment is only one part of the calculation. The total amount you’ll repay matters too.
What to check before consolidating
The reasons for considering debt consolidation are only one part of the decision. Before taking out a new loan, it’s worth comparing the existing debts with the proposed loan in detail.
Look at:
- Interest rate: How does the new rate compare with your current debts?
- Fees: Are there application, ongoing or early repayment fees?
- Loan term: How long will the new loan take to repay?
- Total cost: How much will you repay altogether, including interest and fees?
- Eligible debts: Which of your existing debts can actually be included?
- Repayments: Can you comfortably manage the new repayment alongside your other expenses?
- Existing accounts: What will happen to the old credit cards or other facilities once the existing debts have been paid off?
MoneySmart also suggests stress-testing your budget by considering what would happen if your income dropped, living costs increased or interest rates changed.
It’s particularly important to look beyond the new repayment amount. A consolidation loan can make several debts easier to track, but that doesn’t necessarily mean it will cost less.
Bringing several debts together
There are several reasons people consider consolidating their debts, from simplifying multiple repayments to looking at a different interest rate or repayment structure.
Before taking out a loan, compare what you’re paying now with what the new loan would cost over its full term. Look at the interest rate, fees, loan term, total repayment, and how the new repayments would fit into your budget.
The idea behind consolidation is simple: bring several debts together under one loan. The key is understanding what the new loan will actually cost you.
