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Your Guide to Debt Consolidation

The debt-to-income ratio of Australian households is alarmingly high. While some may argue that it’s not a threat, there is the potential of it becoming an issue in the future, particularly if credit growth accelerated at a rapid rate.

Having debt is often a part of a person’s life. But it is a sensitive topic that can get quite confusing and overwhelming. Millions of Australians owe money that they need to pay on a regular basis. Unfortunately, many of them reach levels that they can no longer manage.

This guide is all about debt consolidation. We will focus on what exactly debt consolidation is and if you are a good candidate for this option.

We will also tackle how you can find help and other things that you can do to finally eliminate debts – or at least those that you cannot manage.

stacked credit cards signifying potential debt.


What is Debt Consolidation?

First things first, what does it mean when you consolidate your debts? The simplest definition is that you consolidate or combine every single debt you have into fewer or a more manageable payment. Ideally, consolidating debt means that you will only have one collective loan to pay.

For example, if you have five debt payments to make to five different lenders, you can get a huge loan to pay them all off. Then, you only have to worry about that one single payment.


Who is Debt Consolidation For?

If you are considering consolidating your debt, it’s probably because you know there is the possibility of saving money. As mentioned, you will pay less in interest and other fees. You may also be interested in simplifying your debts.

Before you start the process, you should first be confident that you can meet the new loan requirements. Since it is usually bigger than your other debts, you should be ready to pay off the entire loan on time and in full.

Is it for you?

If your answer to the following questions is “yes,” then it may be the right choice for your situation:

  • Did you research debt consolidation as thoroughly as you can?
  • Do you know all your debt consolidation options?
  • Have you taken an inventory of your current debts?
  • Do you believe that you can secure a much lower interest rate with a debt consolidation option?
  • Do you think that you can realistically eliminate all your debts within the next five years?A person struggling to get their personal debt in order.

Why Do People Choose to Consolidate Their Debt?

Perhaps the biggest reason why Australians consolidate their debts is to save on the interest rates. When you have two or more loans, you pay for their individual interest. Even if you are confident that all the loans come with the lowest interest rates, they add up to a larger amount. When you combine your payments into one loan, you can save a lot by avoiding those individual interest rates. You will see a significant reduction in the total amount you need to pay over the long term.

But it is not the only reason why people choose debt consolidation.

Here are some of the things that push Australians to combine all loans into one payment:

  • They want to simplify their payment schedules. Imagine needing to pay off five loans each month. It is such a hassle, not to mention expensive and overwhelming. You have to pay your credit card companies, as well as the lenders where you borrowed money from. With all the repayments you need to make, you can hardly track all of them. It’s why many borrowers miss their scheduled payments and are forced to pay late fees or penalties. By consolidating debt, you avoid all the stress and hassle of keeping up with your payment schedules.
  • They want to know when their debt will be paid off. With just one or two regular repayments, you do not only commit to fewer repayments but also forecast when your debts will be cleared.
  • They wish to change their spending habits. The problem does not lie on the debt itself but with how people spend their money. Often, they buy things that they do not need, particularly those out of their budgets. They then turn to lenders to help them pay off the purchase or even fund it. It is a big problem, mainly if you keep racking up on debt.

Pros and Cons of Debt Consolidation

Let us get one thing straight. Debt consolidation is not for everyone. It will work for your situation if you know what you are getting yourself into, and you can truly meet the new repayment requirement. However, it can be detrimental if you do not do the necessary research. You should always have a plan before you try to consolidate your debt.

With that being said, you can figure out whether or not debt consolidation is for you by examining its pros and cons.

Let us first take a look at the advantages:

  • You only need to pay once, instead of paying multiple times each month. When you take out a bigger loan to pay down your credit card debts, for example, you will only have to pay once, whether it is weekly, fortnightly, or monthly.
  • Another big benefit is the convenience that goes with a manageable repayment scheme. You eliminate all the headaches and stressful situations you often find yourself in when you have too many payments to make.
  • You can also obtain fixed rates and terms. You need to select the right lender and loan product to get this benefit. Also, you should be committed to the agreed payment schedule to avoid hurting your credit score.
  • Debt consolidation will lower your monthly payments. When you keep stretching your loans to pay less each month, you actually pay more overall. When you consolidate your debts, the loan term could be shorter with lower interest. You can already see the difference in the amount you will pay in total.

Meanwhile, here are the disadvantages of debt consolidation:

  • You can end up with more debt. If you think that debt consolidation will save you from all your existing debts and bad spending habits, you’re completely wrong. You still need to be careful. Many people accumulate more debt because of this option because they started spending more after seeing that they could free up credit.
  • You could spend more overall. After consolidation, you will only have to pay for one loan, which means you think you have more money to spend. Unfortunately, it will not help, and you cannot fix your bad spending habits.
  • You could choose the wrong lender and loan product. Once you have decided to consolidate your loans, you will find that you have numerous options available. These options can be overwhelming, causing you to select the wrong one. For example, you could be blinded by the low interest, but you did not check whether there are other fees. You probably like the lower repayments each month, but the loan term is too long, meaning you pay more in the long run. As with any financial product, you should always be wise. Read all the terms and conditions and make sure you understand each point.
  • You could damage your credit history. If you cannot keep up with the monthly repayments after debt consolidation, this could be detrimental to your credit score. This rating is essential in ensuring that you will get approved if ever you choose to apply for a new loan in the future.

Weigh the pros and cons listed here to know if debt consolidation is for you. Before you submit an application, you should know that it is not your only option – even if you have huge debts.


Refinancing vs Debt Consolidating

If repaying off all your loans is not an option at the moment, you will find yourself with these two choices: to either refinance or consolidate your debt. We have already discussed what debt consolidation is, so we will talk a little about refinancing and the differences between them.

One of the main similarities of debt consolidation and debt refinancing is that you will potentially pay off your loans and save money doing so. Since debt consolidation is about unifying several loans, debt refinancing is replacing specific loans for a more specific reason. To refinance is to simply replace your debt with another. It does sound a bit like debt consolidation, but it is not. With debt refinancing, you pay off one loan with another to secure a better interest rate, lower monthly payments, change the loan type, or all of the above.

You can even refinance to achieve a consolidated debt.

Now, that probably sounds even more confusing, so let us have an example:

If you bought a home with a 30-year mortgage and the interest rate is 4.75% (fixed), it is a good, yet standard deal. You then saw an offer, which will give you 4.5% interest if you take out a new loan. Home loans are huge and can take a long time for you to pay them off. After calculating the balance and the interest, you see how much you could save in the long run. Therefore, you go and refinance your home loan by taking out a new loan to pay off the old one.

The difference between debt consolidation and debt refinancing is in the outcome. In debt consolidation, you aim to turn many debts into one debt. With the right product, you can save money and make debt management so much easier. On the other hand, refinancing is done to optimise your existing debt to replace it with a new one that’s more favourable. Usually, the goal is to lower the interest rate.

Some people combine the two where they refinance and consolidate their debts all at the same time. So, which one is the better option for you? The answer depends on your circumstances. If you owe several small debts, such as credit card debts, or deal with different lenders, debt consolidation is a good option for you. Meanwhile, if you want to make one debt more manageable, you could benefit more from refinancing.

A lady snapping a credit card on top of her finances.


Tips and Tricks on How to Consolidate Your Debt Successfully

Let’s say that you are set on consolidating your debt. Then, it is time to choose the best method that will work for you. There are various choices out there, but the top ones are:

  • Credit Card Balance Transfers – The method here is simple, and it works if you have plenty of credit card debt. What you will do is to transfer your balance from one card to another, ideally a new one. A new credit card has more attractive offers, including lower fees and interest rates.There are also credit cards that provide no-interest temporarily when customers move their debt. Note, however, that once the introductory period expires, you will have to repay the standard interest rate. It’s why this method is best if you believe that you can pay off your debt before the end of that period.
  • Home Refinancing – For those with a home loan, refinancing is a good idea where you use your home to refinance and consolidate debt. When done correctly, you can save more, especially on your mortgage.
  • Personal Loans – The concept is to take out a new personal loan. You can find products that are designed especially for consolidating debt. With this type of loan, you can get the funds you need to pay off your other existing debts. Then, you will only have to repay this new loan in one payment schedule. It’s probably the best option you have, chiefly if you could secure a loan with a much lower interest rate.
  • Home Equity Loans – If you are a homeowner, a home equity loan is a popular way to get rid of all your debts and just pay off this loan. The amount you can borrow will depend on the amount of equity you have. Do remember that you are at risk of losing your property if you fail to repay this loan.
  • Debt Settlement – If the options mentioned above are not plausible for your situation for some reason, one way to get out of trouble is through debt settlement. You will, however, have to hire a debt settlement company. Then, a representative will negotiate your debt with all your lenders. If the discussion is successful, you can have a more manageable repayment every month.No matter what you choose, the best way to eliminate debt is to avoid making new ones. Follow the repayment schedule, so you do not need to pay any penalties or other fees. Try to pay off your consolidated loan on time and in full all the time. With these tactics, you could find yourself one-day debt-free.


Consolidating your debt can be a great way to help you save on interest in the long-term.

If you’re in WA and are looking for a mortgage broker Perth residents trust during this process, get in touch with our friendly team today.

Gavin Harrigan

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With over 18 years in the finance industry, Gavin's wealth of knowledge relating to home loans is matched by few in Australia. This knowledge is reflected in his dozens of awards, including being inducted into the Plan Australia Hall of Fame. His qualifications include a Bachelor of Commerce from Curtin University for Applied Finance and Commercial Law and a Diploma of Finance and Mortgage Broking Management from AAMC Training Group.

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