- Debt consolidation combines multiple personal debts into a single loan, making repayments simpler and potentially saving on interest.
- Choosing a licensed and transparent lender is crucial, as some providers may charge hidden fees, push unnecessary loans, or make unrealistic promises.
What is debt consolidation?
Debt consolidation combines a number of personal debts, whether that be credit cards, car loans or personal loans, into one single debt with a sole lender. Aside from combining multiple debts, debt consolidation can be used as a strategy for saving money on repayments and interest, if you can lower your overall interest bill by finding a low-rate debt consolidation loan.
How does debt consolidation work?
Debt consolidation is the process of combining multiple debts into a single personal loan. This allows you to manage just one repayment schedule and interest rate, rather than juggling several accounts with different rates, amounts, and due dates.
For example, imagine you have three forms of personal debt:
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Travel credit card with a $1,500 balance
-
Rainy day credit card with a $500 balance
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Personal loan with a $2,000 balance
By consolidating these into one personal loan, you now have a single repayment to manage over a set term, often making budgeting simpler and potentially saving on interest.
Which lenders offer debt consolidation loans?
From big-four banks to digital lenders, there are a number of lenders that offer debt consolidation loans. Some of these include:
- CommBank
- NAB
- Westpac
- ANZ
- Great Southern Bank
- Newcastle Permanent
- ING
- HSBC
- Teacher’s Mutual Bank
- OurMoneyMarket
- Now Finance
- Latitude
- Wisr
- Moneyplace
- Harmoney
- Revolut
Why consider a debt consolidation loan?
Considering a debt consolidation loan means the process of paying multiple debts is streamlined, with one due date and one set of fees – if fees are associated with the lender's product. The biggest benefit to most borrowers is that debts with higher interest fees, like credit cards, are suddenly subject to lower rates.
Before considering whether a debt consolidation loan is right for you, it’s important to weigh up the positives and negatives.
Pros and cons of debt consolidation
At a glance, here are the advantages and disadvantages of getting a debt consolidation loan:
Pros
- Combines multiple debts into a single monthly repayment.
- May reduce overall interest compared to high-interest credit cards.
- Makes budgeting simpler with a fixed term and repayment schedule.
- Can improve credit management if payments are made on time.
Cons:
- Some loans charge upfront application or setup fees.
- Longer repayment terms can increase the total interest paid.
- There is a risk of accumulating new debt if spending habits aren’t controlled.
It's important to keep in mind that consolidation does not solve the underlying causes of overspending or poor financial planning. Ultimately, if a debt consolidation loan benefits your current situation by streamlining debts at a faster pace and lower cost, then it should be considered as a positive step forward to enhancing your financial position.
What to avoid when choosing a debt consolidation loan
Many trusted Australian banks offer debt consolidation loans with clear terms and competitive rates, but there are also sketchy lenders that may charge hidden fees, push unnecessary loans, or make unrealistic promises, so it’s important to choose a licensed and transparent provider.
Ask yourself these questions to spot red flags and avoid risky lenders:
- Is the lender unlicensed or not regulated by ASIC?
- Are they asking you to sign incomplete or blank documents?
- Do they clearly outline all fees, interest rates, and repayment terms in writing?
- Are they pressuring you to make a quick decision?
- Are they suggesting a complex business loan when a standard personal loan would suffice?
- Are they promising to erase your debt instantly or guarantee unrealistic results?
Other methods to consolidate debts
Aside from combining your debts into a debt consolidation loan, there are a number of other methods available to help eliminate multiple debts.
Credit card balance transfer
This method requires moving the balance from one credit card to another with a low-rate or, if available, a 0% interest rate. Typically, transferring the balance and paying off the credit card while the low-rate or 0% offer is effective, will ultimately save both time and money on interest expenses. On the flip side, if payments cannot be made, it may end up costing you more.
Absorbing debts into home loans
By absorbing all existing debts into a mortgage, homeowners are able to refinance their home loan to a larger loan accommodating for these debts. Homeowners may also be able to apply to increase their existing home loan, depending on the lender and the loan structure. Absorbing debts into a mortgage allows all debts are gradually paid off by way of regular mortgage repayment.
First published in March 2023
