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Debt can be confusing and overwhelming for the average Australian, but it’s also incredibly common. Millions of Australians encounter debt, with many reaching unmanageable levels.

In this guide, you’ll learn about your options when it comes to debt consolidation, whether you’re a good candidate for debt consolidation, and how you can find help with your debt.


What is debt consolidation?

Debt consolidation involves combining all your existing debts into fewer - typically just one - loan or payment. By combining your debts from different lenders, you don’t have to worry about making multiple payments each month, and you may even be able to secure a lower interest rate.

Why do people consolidate their debt?

There are three main reasons why everyday Australians consolidate their debt.

  1. To simplify their monthly payment schedule. When borrowers owe money to several different entities, like credit card companies or personal loan lenders, it can become overwhelming. Consolidating each bill into one payment makes paying off debt easier and potentially less stressful. With one payment, borrowers are less likely to encounter missed or late payment fees.
  2. To know when their debt will be paid off. By consolidating debt into a personal loan, borrowers commit to regular repayments and may therefore be better able to forecast when their debt will be fully cleared.
  3. To lower their interest rate. Often, borrowers can secure a lower interest rate when they consolidate their debt into one payment. By paying a lower interest rate, borrowers can actually reduce the amount they pay in the long term.

Who should consider debt consolidation?

Borrowers should consider debt consolidation if there is potential to save money (through lower interest rates and/or fees), simplify their debts or both.

Before going through with debt consolidation, borrowers should be confident they can meet the new repayment schedule and ultimately pay off the entire new loan.

If your current debt will take more than five years to pay off even after consolidating, then debt consolidation may not be the best choice.

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Just because debt consolidation may sound appealing, it doesn't mean you should jump straight in.

Debt consolidation can be very beneficial when done well - but it may cause harm if not everything goes according to plan.

So make sure you do your research before embarking on debt consolidation.


Should I consolidate?

Debt consolidation can be a promising way to reduce debt payments and even lower your debt amount, but it isn’t for everyone, and there are pros and cons to debt consolidation.

It’s important to understand what debt consolidation is before deciding if it’s right for you.

How do I know if debt consolidation is a good idea for me?

If you can say ‘Yes’ to the all of the below criteria, you may be a good fit for debt consolidation. Keep in mind that debt consolidation is not for everyone, and it is not the only option for borrowers with high amounts of debt.

  • I have researched my debt consolidation options
  • I have taken an inventory of all my existing debt
  • I can secure a lower interest rate with a debt consolidation credit card or personal loan
  • I can realistically pay off my debts within five years

What are the benefits of consolidating my debt?

Debt consolidation offers four main benefits:

  1. Just one regular monthly payment
  2. Better control of your debt
  3. A lower interest rate
  4. A clear time period for paying off your debt

Case study: Anna decides if debt consolidation is right for her

Anna has accumulated a high amount of debt on two credit cards and a personal loan. Because each payment is due at different times throughout the month, she has missed payments and paid late payment fees.

Anna starts to investigate her debt consolidation options, but isn’t sure if she’s a good candidate. Anna sees a personal loan meant for debt consolidation and does the math. She calculates that she can secure a slightly lower interest rate than her current personal loan and will be able to clear her debt in less than four years.

She decides that she is a good candidate for debt consolidation and applies for the debt consolidation loan.

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If you feel like debt is weighing you down, there are some professional and not-for-profit services that may be able to help.

There are also four final tips to remember if you've decided to go ahead with debt consolidation.


Where to find help when consolidating debt

Debt can be difficult to manage on your own, but there are several resources you can use to help understand your debt and find solutions.

Financial counselling

Financial counselling can be a sound way to get back on your feet. Services like Commonwealth Financial Counselling (CFC) are operated through local government departments and aim to help you address your financial issues and make informed decisions. Benefits of CFC include:

  • Manages creditors
  • Potentially opens up smoother payment options
  • Helps plan a budget
  • Guides you through debt recovery

Please note that CFC does not provide legal advice, does not provide business advice and cannot loan money.

National Debt Helpline

The National Debt Helpline is a not-for-profit, free helpline service that aims to help people tackle their debt problems. Benefits include:

  • Free service
  • Helps negotiate payment terms
  • Provides guidance in prioritising your debts
  • Supports the consolidation of your loans
  • Enables you to file for bankruptcy

Like CFC, the National Debt Helpline cannot provide legal advice.

Debt solution firms

Debt solution firms are paid services that attempt to reduce your payments, negotiate with creditors and lower your debt. Because consumers with debt are likely already struggling financially, paid services should only be used if absolutely necessary.

Pros
  • An experienced, ethical professional could
  • You can benefit if the company reduces you
Cons
  • The company may charge you high fees
  • You might get stung by surprises buried in

Debt consolidation tips

Create a debt consolidation plan

Take the time to create a debt consolidation plan that outlines the solution and your new payments. The plan should confirm that your debt consolidation option will indeed save you money in the long run.

Be disciplined

After you’ve consolidated your debt, it’s important to be disciplined in your new approach. Ensure you know your payment schedule and make your payments on time.

Make extra repayments

When possible, it may be a good idea to pay off your loan ahead of schedule, as this could reduce the amount of interest you pay over the life of the loan. (Please note, though, that some lenders charge penalty fees for closing a loan early.) In the case of credit cards, it's generally a good idea to pay off your entire debt each month rather than make just the minimum payment.

Create and follow a budget

After you’ve consolidated your debt, the last thing you want is to end up in another cycle of debt. Create either an individual or household budget that outlines exactly what you can afford to spend each month. Follow your budget to ensure you don’t find yourself under a pile of debt once again.

Did you know...?

The National Debt Helpline is equipped to handle a range of debt types, including living expenses like utility bills and housing, credit debt including payday loans and credit cards, and other debt such as those from Centrelink and tax debts.

The National Debt Helpline can deal with a variety of debt problems and also provide a variety of solutions. They can help you manage your debt through consolidating, negotiating, and prioritising your debts, or help you seek extra funds with concessions, grants and no-interest loan schemes. They can even help those in extreme debt with solutions like emergency assistance and bankruptcy.

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Decided to consolidate your debt? If so, take the time to read about the five different debt consolidation options and the six steps you need to follow to make your debt consolidation a success.  


Five ways to consolidate debt

There are several ways that borrowers can consolidate their debt. The five most common methods include:

  1. Credit card balance transfers
  2. Home equity loans
  3. Debt consolidation personal loans
  4. Home refinancing
  5. Debt settlement

1 Credit card balance transfers

One way borrowers can consolidate their credit card debt is with a credit card balance transfer offer. Balance transfers allow you to move debt from one credit card onto a new credit card.

In some cases, customers may be able to transfer other types of debt to a credit card.

Balance transfers are a relatively easy way to consolidate your debt and can help lower your payments if you find a balance transfer that offers lower interest rates, lower fees, or both.

Many credit cards even charge reduced interest or no interest for a temporary period when customers transfer their debt. After the introductory period has expired, the interest rate will revert to the standard rate.

2. Home equity loans

If you own a home with equity, a home equity loan may be an option for consolidating your debt. A home equity loan can give you the funds you need to pay off your existing debt. Depending on the amount of equity you have in your home, you may be able to secure a reasonable interest rate on your loan.

While home equity loans can be a sound way to consolidate your debts, it’s important to consider the drawbacks. By taking out a home equity loan, you put your house at risk should you default on your payments. That’s why it’s important to be confident you can make your repayments on time and in full before committing to a home equity loan.

3. Debt consolidation personal loans

Another popular way to consolidate debt is to take out a personal loan designed for debt consolidation.

A personal loan provides the funds to pay off your other debts while taking on a single regular payment. Because borrowers are put on a stable payment schedule, they’re able to predict when their debt will be paid off.

A debt consolidation personal loan may be the right option if you can secure a lower interest rate than you are paying on your current loans.

4. Home refinancing

If you have a home loan, you’ve likely come across the idea of refinancing. Refinancing your home is a form of debt consolidation that - if it's done correctly - can reduce the overall cost of your mortgage.

5. Debt settlement

If balance transfers, personal loans and refinancing would still leave you in unmanageable debt, then debt settlement may be a sound option.

Debt settlement involves hiring a debt settlement company that will help you negotiate your debt with your lenders and potentially create manageable monthly payments.

How to consolidate debt

Consolidating your debt can seem complicated, but by following the proper process, you can ensure you’re making the right decisions for your financial standing. Here are the six steps to follow:

  1. Take an inventory of your debt
  2. Review your options
  3. Calculate your interest and payments
  4. Choose the best option
  5. Apply for your chosen debt consolidation option
  6. Understand your payment schedule – and follow it

1. Take an inventory of your debt

In order to make the best decision for your finances, it’s a good idea to take an inventory of your debt. It’s important to know how much you owe (your debt) and to whom (your creditor). Understanding this information is the first step in creating a debt consolidation plan.

2. Review your options

There are many debt consolidation options out there, so it's important to research your options. Depending on your income, debt amount and credit history, certain consolidation options may be suitable or unsuitable, making it essential to evaluate the different methods of consolidation and compare debt consolidation loans if applicable.

3. Calculate your interest and payments

No matter which debt consolidation method you choose, you should calculate exactly what you’ll owe in interest and payments each month. By understanding your financial obligations, you’ll not only be prepared for monthly payments but also make your debt more manageable.

4. Choose the best option

After you’ve taken inventory of your debt, researched your consolidation options, and calculated the interest and payments you can afford to pay, it’s time to decide how and if you’ll consolidate your debt.

5. Apply for your chosen debt consolidation option

If you choose a balance transfer or loan, you'll need to wait to be approved and possibly pay application fees as well. Before applying, make sure you have the required documentation and understand the interest rates and fees. If you’re exploring a debt settlement, you’ll likely need the help of a debt negotiation company. They’ll help you come to an agreement with your creditor regarding interest and monthly payments.

6. Understand your repayment schedule - and follow it

While debt consolidation can help make your debt more manageable by simplifying your repayments - you still need to make them in full and on time. Missing repayments can lead to high late fees as well as additional debt.

Did you know that RateCity has a refinancing guide? In our Refinance Guide, you’ll learn all the ins and outs of home refinancing.

Home refinancing can have a range of benefits, including lower loan costs, the opportunity to pay your loan faster, and to increase your loan features and flexibility. While refinancing can save money, you should also be aware of the costs of refinancing. You may be required to pay discharge fees, upfront fees, and break fees.

Like all loans, it’s important to compare home loans before committing.

^Words such as "top", "best", "cheapest" or "lowest" are not a recommendation or rating of products. This page compares a range of products from selected providers and not all products or providers are included in the comparison. There is no such thing as a 'one- size-fits-all' financial product. The best loan, credit card, superannuation account or bank account for you might not be the best choice for someone else. Before selecting any financial product you should read the fine print carefully, including the product disclosure statement, fact sheet or terms and conditions document and obtain professional financial advice on whether a product is right for you and your finances.

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