Managing multiple debts can be challenging. If you are struggling to make repayments, debt consolidation could help you take control of your finances.
Short on time? Here’s a quick summary:
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.
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.
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:
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.
There are a number of types of debt you may be able to combine with debt consolidation including:
How can I consolidation 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?
IThe 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.
Can debt consolidation impact my credit score?
Yes, debt consolidation can impact your credit score in the short term. Credit scores can be impacted when lines of credit are applied for, particularly if multiple applications are made within a short period of time. However, if you consolidate debt and consistently make your repayments, it could potentially improve your score.
Should I consolidate debt into my home loan or a personal loan?
The right strategy depends on your circumstances. Consolidating into your home loan often gets you a lower interest rate because the loan is secured by your property. However, this means your debt is tied to your home. A personal loan keeps your home separate but might have a higher interest rate. We’ll help you crunch the numbers to compare the total interest costs and risks of both options so you can choose what’s right for you.
Will I end up paying more interest in the long run?
Potentially, yes, if you extend your loan term. If you spread your total debt over a much longer period (e.g., 20+ years on a mortgage vs. 3 years on a car loan), your monthly payment might drop, but the total interest you pay over the life of the loan could rise. We help you calculate the total cost, not just the monthly savings, to ensure you are actually getting ahead.
What do lenders look for when I apply for debt consolidation?
Lenders want to see stability and a clear plan. They will typically review your income, current employment and your repayment history – essentially, whether you’ve been paying your existing debts on time. They also look at your debt-to-income ratio. We’ll help you prepare your application to highlight your ability to manage the new, consolidated repayment plan.
