What is a debt consolidation personal loan?

If you’re paying off multiple credit cards, car loans, personal loans, or a combination of these, chances are you’re paying more in fees and interest than you need to. This is where debt consolidation using a personal loan can be handy. By rolling all your existing expenses into one loan, you can simplify your financial situation and potentially reduce how much you’ll pay in account keeping fees and interest costs.

Why use a personal loan for debt consolidation? 

Using a personal loan to consolidate debts can be a good strategy for borrowers who feel their financial situation is getting out of hand. With the right debt consolidation personal loan, it’s possible to pay less interest and fees on your debt, relieving some of your financial pressure.

Debt consolidation can help you to better manage your debts and avoid defaulting on a repayment. With just the one repayment to think about, calculating your incoming and outgoing expenses should be much simpler.

Using a personal loan for debt consolidation could also let you take advantage of features that your current loans may not offer, such as making unlimited extra repayments or a redraw facility. Changing your repayment frequency by switching to weekly or fortnightly repayments from monthly repayments can help you reduce the amount you pay in interest costs on your loan as interest is usually charged daily. So paying more frequently can help you reduce those charges.

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12.69%

Fixed

13.56%

NAB

$1006

36 months

1 year to 7 years

2.99

/ 5
More details

12.69%

Variable

13.56%

NAB

$1006

36 months

1 year to 7 years

3.07

/ 5
More details

10.50%

Fixed

11.38%

ANZ

$975

36 months

1 year to 7 years

3.26

/ 5
More details

11.89%

Variable

12.15%

CUA

$995

36 months

0 year to 7 years

3.23

/ 5
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12.99%

Variable

13.86%

ANZ

$1011

36 months

1 year to 7 years

3.02

/ 5
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4.45%

Variable

4.65%

Endeavour Mutual Bank

$892

36 months

0 year to 7 years

4.71

/ 5
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4.61%

Variable

11.42%

Coastline Credit Union

$894

36 months

1 year to 7 years

4.65

/ 5
More details

Learn more about personal loans

What are the pros and cons of debt consolidation personal loans?

As with any financial product, there are pros and cons to using it. You need to consider all of them in deciding whether a debt consolidation personal loan is best for you financial situation. 

  • Easy all-in-one monthly repayment
  • Budgeting is easier with one regular payment
  • Fewer account keeping fees
  • Potentially lower interest rate
  • May not be the cheapest option available
  • May be difficult to get loan approval if you’ve already defaulted on payments
  • Paying a debt over a longer loan term can mean paying more in interest, and in turn a higher total cost of the loan
  • If you get access to more credit in your consolidated loan, you could end up spending and owing more throughout the life of the loan
  • Avoid refinancers who promise getting you out of debt, no matter how much you owe

What types of debt can personal loans solve?

  • Credit cards: You may have multiple credit card debts that you want to consolidate in order to make repayments easier to manage over a set loan term. Or perhaps you only have one credit card that you wish to consolidate with other types of debt. Either way, credit card debt is one of the more common forms of debt that borrowers choose to consolidate with a personal loan. It's worth noting, however, that you likely also have the option of a balance transfer if you are looking to consolidate credit card debts alone.
  • Existing personal loans: Regardless of the original loan amount or purpose, you may have one or more existing personal loans that you would like to consolidate with other credit products by taking out a new personal loan. If this is the case, also consider whether refinancing could also be an option.
  • Car loan: If juggling your car loan repayments with other types of debt has become difficult to manage, a debt consolidation loan may simplify your finances and potentially lead to cost savings, depending on your personal situation. Keep in mind, however, that if your current car loan is a secured loan, it may have a more competitive interest rate than an unsecured personal loan can offer. Be sure to make a comprehensive comparison before making your decision.
  • Debt collection agency debt: If you have outstanding bills or fines owed to a company or organisation, which they have made failed attempts to recover from you, they might pass them on to a debt collection agency. Some credit providers may allow you to consolidate debts held by debt collection agencies with a personal loan.

How can you consolidate your debts using a personal loan?

The best way to consolidate your debts will depend on your situation. For example, if you have multiple credit card debts and no existing personal loans, then you could apply for a personal loan and once it’s been approved, use the cash to pay off those credit card debts.

However, if you already have a personal loan, and also owe money on a credit card and a car loan, you may be able to refinance your current personal loan to cover the other debts, and continue to enjoy the personal loan’s interest rate.

But if your existing personal loan or car loan is a fixed rate loan as opposed to a variable rate loan, you may have to pay an early repayment fee to consolidate that debt. Check with your lender to find out how much you may need to pay, including any loan application fees or establishment fees for opening a new loan.

If you’re not sure of the best debt consolidation option for you, it may be worth getting some professional guidance from a financial counsellor or broker.

Example: Bella rolls her debts into one

Bella has two credit cards, each with a $2000 debt owing and monthly repayments due at separate times. They both have interest rates over 20 per cent. She also has $5000 left on her car loan that she is paying off on a monthly basis with an interest rate of around 8 per cent.

She makes a total of three separate repayments each month, plus pays $250 in annual fees for the cards and car loan. While she can afford all of these repayments, Bella finds it hard to keep track of due dates (making a default more likely) and how much she has paid off on each credit facility. 

Bella has her sights set on a big overseas holiday, but wants to be debt-free before she starts to save. She decides that the easiest way to do this is to roll all her debts into a personal loan so she can make one monthly repayment and control the time it takes to repay the debt. She opts for a personal loan with an interest rate of around 10 per cent – half of what she’s currently paying on her credit cards. 

Once she is approved for the personal loan, Bella uses the cash to pay off the credit cards, effectively rolling them into the one loan. As her car loan doesn’t allow unlimited extra repayments, Bella has to pay a small fee to pay out the loan and roll it into her new personal loan. Bella calculates that the money she can save on annual fees and by paying her car off sooner will make this upfront cost worth it in the long run. 

Now, with all her debts rolled into one, Bella knows that she can be debt-free by this time next year, and start saving up for her dream holiday.

Can I get a debt consolidation personal loan with bad credit?

Consolidating debt using a personal loan may not be the most ideal solution for borrowers who have a bad credit history, such as when you have previously defaulted on repayments. If you don't have a good credit score, it is unlikely that your application for a low-rate personal loan would be approved. Any loan rejection could further damage your credit score.

If you are struggling to afford your loans and can’t consolidate your debts, consider contacting your creditors immediately to discuss a financial hardship plan. For borrowers already in a dire financial situation, it may be wise to seek financial counselling to figure out an appropriate debt consolidation plan. A professional financial counsellor can also help you enter a debt agreement, which is a form of bankruptcy.

For more information on contacting a financial counsellor, visit the ASIC Money Smart website or call the National Debt Helpline on 1800 007 007. 

Is there a risk that debt consolidation could add to my debt?

When it comes to any kind of financial commitment, it's important to weigh up the risks involved before you sign on the dotted line. Though taking on a debt consolidation loan may make your debts easier to manage, it's still crucial to have a strategy in place to ensure you meet the minimum repayments on the new debt. Failing to do so could lead you to default, thus hurting your credit score and potentially racking up late fees and an increased amount of interest charges.

Carefully consider your choice to consolidate your debts by getting an estimate of what your personal loan repayments might look like. Then you can assess whether they will fit comfortably within your budget, and avoid adding further debt or getting into a position of financial strain.