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Published February 24, 2023
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Debt Consolidation: What It Is and How It Works

Debt consolidation rolls multiple debts into a single payment. It can be a good idea if you qualify for a low enough interest rate.

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Debt becomes more difficult as it multiplies. A credit card or two. A personal loan. A car lease. HECS-HELP debt. An ATO tax debt. 

With each new obligation, debt can become this all-consuming massive thing with many moving parts. Because there’s always something due, there’s no room to breathe. You may feel like you’re just keeping your head above water, making little progress thanks to interest charges — even with all your money going to repayments. 

Debt consolidation can be a way out of this disempowered state. 

By rolling all your debts into one, debt consolidation loans make repayment easier and potentially save you significant money. 

What is debt consolidation? 

Debt consolidation, sometimes referred to as refinancing, is the process of combining separate debts into one larger loan.

When you consolidate debts, you only need to remember and plan for one monthly repayment. This can elevate your state of mind because you’re not funnelling out every dollar you make, every pay cycle… or constantly thinking about it. 

But debt consolidation isn’t without pitfalls. You need to consider the associated fees, interest rate, the terms of the consolidation, and the illusion of ‘having more’ to spend. It requires a different way of looking at and managing your money

The power of consolidation is simplifying your debts. One payment, at one interest rate, is paid once a month. 

Types of debts that can be consolidated 

You can consolidate a wide range of debts. Home furniture payment plans, credit cards, personal loans, ATO debts, mortgages, car loans and more. 

The goal is to streamline your finances, having one single monthly responsibility rather than many (that can easily get missed), and paying less in interest over the course of the loan as a result. If you’ve been struggling with debt for some time, you know how difficult it is to see your hard-earned repayments get eaten up by interest. 

Check in with yourself: If consolidating saves you money, what will you do with it? Have a strategy in place, before you consolidate your debt to avoid spending what you’re saving.

How to consolidate debt  

Debt consolidation loans

A debt consolidation loan is a personal loan taken out for the combined amount of all your other debt at a lower interest rate. 

Let’s say, for example, you have two credit cards with different banks, totalling $20,000 in debt. Both cards will have separate interest rates, repayment dates, interest-free windows, and T&Cs. 

Instead of paying the average credit card interest rate of 19.94%, two times, you can apply for a personal loan with a lower fixed interest rate.

Secured vs unsecured debt consolidation loans 

With secured debt consolidation loans, you use an asset, such as a car or house, as security. This protects the lender against default, should you fail to repay the loan according to the agreement. Unsecured loans, on the other hand, require no proof of assets. For this reason, they’re usually harder to be approved for. 

The lender you choose to work with should be able to tell you if you need to provide security or not. It’s best to speak with someone before you apply for a loan online because no two situations are the same. 

Generally speaking, unsecured loans tend to have higher interest rates and will be for smaller amounts ($100,000 or under). Because they come with less risk for lenders, secured loans are offered at lower interest rates with higher borrowing amounts. 

An important caveat: For unsecured loans, the asset’s worth doesn’t match the loan amount. Just because you own a $25,000 vehicle that you can use as security doesn’t automatically mean you’ll get approved for a loan of an equal amount. 

Approach debt consolidation lenders with caution

Consolidating or refinancing your debt in Australia can feel like the wild, wild west. There are companies out there promising ‘debt-free in 12 months.’ While this is certainly possible for some, these sweeping statements can be misleading and even damaging for individuals with a great deal of debt. 

Avoid companies that set these unrealistic expectations. Do not speak with debt consolidation companies who are not licensed, ask you to sign blank documents, refuse to discuss the repayments, rush to an agreement, won’t put the interest rate in writing or attempt to sign you up for a business loan (when you’re an everyday consumer). 

Check for qualifications and licences, and always, always go with your gut. 

Ask around, don’t rush into anything, and bring a family member in for a second opinion. If done correctly, refinancing is a smart strategy to manage overwhelming debt.

» MORE: How To Apply For a Personal Loan

Pros and cons of debt consolidation loans

The pros of consolidation are: 

  • Easier to stay on top of all the repayments. 
  • Avoid paying late fees.
  • Repay your debt at a lower interest rate.
  • Potentially get out of debt much sooner.

The cons of consolidating are: 

  • You could end up paying more, even with a lower interest rate. Before signing up for a debt consolidation loan, ensure you understand the initial and ongoing fees, if you’ll be penalised for paying off the loan early, and how to protect your assets. 
  • If the debt is large, it could affect your credit score. Aim to apply for and use less credit than you’re eligible for. 
  • If you default in a secured loan, your assets might be on the line. 

» MORE: How to Get Out of Debt

Who to speak to about debt consolidation in Australia 

As you start your search, you might feel overwhelmed by the number of debt consolidation providers. The point is important to mention again — avoid companies making unrealistic promises. 

There are providers in the market who prey on the vulnerability of individuals in debt. Don’t speak with unknown, unlicensed debt consolidation companies. They’re in the market to make money rather than to help you get out of debt. The most common way to consolidate is to go through your bank. 

Calculate your debt and know your numbers. Contact the National Debt Helpline for professional financial advice. Check if you’re eligible for urgent financial support for the essentials – food, transport, clothing, utilities, etc. 

Talk to your credit providers about your options. They might be able to offer a new agreement based on what you can afford. Consider if you’re suitable for a secured or unsecured loan. Lean on personal and professional support. 

When it comes to big financial decisions, do it along with a trusted loved one or friend. This is especially important in situations where individuals owe money. Even if you got into this situation by yourself, you don’t have to go through it alone.

» MORE: Financial Counselling: What It Is and How It Can Help


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