Debt consolidation: is it right for you?
Managing multiple debts can be stressful, especially when they come with different due dates, interest rates, and repayment amounts. Debt consolidation is a financial strategy that allows you to combine several debts—such as credit cards, personal loans, or store cards—into a single loan. This simplifies your finances and can potentially reduce your monthly repayments, but it’s important to understand how it works and whether it suits your situation.
What is debt consolidation?
Debt consolidation involves taking out a new loan to pay off your existing debts. Once your separate debts are cleared, you’re left with one repayment to manage instead of many. In Australia, this is typically done through a personal loan or by refinancing your home loan.
You may also come across balance transfer credit cards, where you move credit card debt onto a card with a lower interest rate—sometimes even 0% for an introductory period.
Potential benefits of debt consolidation
- Simplified finances
Managing a single loan is easier than juggling multiple debts with various due dates and lenders. - Lower interest rates
If your new loan has a lower interest rate than your previous debts, you may save money over time. - reduced monthly repayments
By extending the loan term, your monthly repayments could decrease, freeing up cash flow. - Improved credit score over time
Consistent repayments on a single loan may help improve your credit score, especially if you’ve struggled with missed payments in the past.
Things to consider before consolidating
- Total cost over time
While monthly payments might be lower, extending the loan term could mean you pay more interest overall. - Fees and charges
Consider any establishment fees, exit fees from your current debts, and other costs associated with the new loan. - Discipline required
If you clear credit cards with a consolidation loan but continue to rack up new debt, you may end up in a worse financial position. - Secured vs. unsecured loans
Some consolidation loans, such as mortgage refinances, are secured against your property. This means your home could be at risk if you can’t make repayments.
Is debt consolidation right for you?
Debt consolidation can be an effective solution if you’re struggling to keep track of repayments or want to reduce your interest burden. However, it’s not a one-size-fits-all fix. It's best suited for people who:
- Have multiple debts with high interest rates
- Are committed to responsible spending going forward
- Can qualify for a lower-rate loan or refinance option
- Want to simplify their financial obligations
Next steps
Before consolidating, it’s wise to:
- List all current debts, including balances, interest rates, and monthly repayments
- Compare debt consolidation products from different lenders
- Consider speaking with a finance broker or adviser for tailored guidance
Debt consolidation can bring clarity and control to your finances, but only if it’s used as part of a broader plan to manage spending and avoid future debt traps.
