- Debt consolidation combines multiple separate debts (e.g., credit cards, car loans, personal loans) into a single loan account with just one recurring repayment.
- It’s typically executed by taking out a new single personal loan or by refinancing a home loan to access existing equity.
- Debt consolidation can provide lower interest rates than high-interest products like credit cards, along with set loan terms that provide a clear finish line for becoming debt-free.
- Lengthening the loan term (such as adding short-term debt to a home loan) can increase total interest paid.
Debt consolidation is where you roll multiple debts into one account in order to simplify your repayments. This means instead of having a different repayment for each loan, such as personal loans, car loans and credit cards, you only have one.
There are a number of ways you could consider consolidating debt. These include combining into one personal loan or adding it to your home loan.
Debt consolidation can be a beneficial decision for a number of reasons but it may not be right for everyone.
How does debt consolidation work?
Debt consolidation works by either taking out a new personal loan or refinancing your home loan to access equity and then using that borrowed money to pay off your debts. You will still owe back that money, but it will be through the one, consolidated debt rather than multiple.
Interest rates on debt consolidation loans may be lower than those on other forms of debt like credit cards. This can mean you pay less interest over the life of the debt.
Unlike a credit card or line of credit, personal loans and home loans have fixed loan terms. This provides a clear end date and gives you a strict finish line to paying off your debts.
The loan you use for debt consolidation may have a fixed or variable interest rate. The interest rate and repayments on a fixed-rate loan will stay the same for the agreed term, which can make budgeting simpler. The interest rate on a variable rate loan could rise or fall during your loan term, which can affect your repayments and make budgeting trickier, but these loans are more likely to offer extra flexibility, such as the ability to make extra repayments.
Is debt consolidation right for me?
Managing multiple debts can be challenging. If you are struggling to make repayments, debt consolidation could help you take control of your finances, but debt consolidation may not be right for everyone. You need to consider your individual financial situation before making a decision to consolidate your debt. As with most things, there are both pros and cons to consolidating your debt.
Debt consolidation could simplify your repayments into only one. If you move to a lower interest rate, it could also save you money. However, if you expand the term of your home loan to access equity, it is a good idea to calculate how much the additional time will add in interest repayments. Always consider the overall costs involved and the impacts to immediate cash flow before making your decision. Your Loan Market broker can help with this.
Key things to consider
There are a number of factors that need careful consideration before choosing to consolidate your debt. The main questions to ask include:
- Are there any fees for paying any of the debts off early?
- Are there any application, legal or valuation fees or changes to the stamp duty costs?
- Are you comfortable with the security? For example, if rolling unsecured personal loans or credit cards into your home loan, your home is used as security. This means should anything happen and you can no longer meet repayments, the lender is within its rights to sell your home to recoup costs.
- Will the new debt have a longer loan term, which could mean paying more interest over time?
Why see a broker?
Debt consolidation can be an effective way for some people to save money and make repayments simpler. However, there are a number of considerations to ensure it is the right strategy for you. A broker will get to know your situation and goals and crunch the numbers for you to determine whether debt consolidation could be the right choice for you. Loan Market range of lenders to find one that suits your needs and offers a competitive rate.
FAQs
What debts can I combine with debt consolidation?
There are a number of types of debt you may be able to combine with debt consolidation including:
- Credit cards
- Store cards
- Personal loans
- Car loans
- Buy now, pay later services
How can I consolidate my debt?
Debt can typically be consolidated under a new single personal loan or by refinancing a home loan to access existing equity. To find out the right way for you, chat to a Loan Market broker.
What are the disadvantages of debt consolidation?
The potential disadvantages of debt consolidation are dependent on a person’s individual circumstances. Some risks include lengthening the loan term (such as adding short-term debt to a home loan), which can increase total interest paid; early exit fees, application costs, and putting up your home as security for previously unsecured debt.
Find out more about your options with a free chat with a Loan Market broker.
