How To Consolidate Debts in Australia
No one means to get into debt; it just happens over time. It starts with putting a couple of larger purchases on a credit card, then managing day-to-day expenses from food and petrol, to unexpected issues and bills. We all know how fast it can happen. Dent consolidation loans are a popular method to help you consolidate debts, but they are not your only option. Learning about how to consolidate debts in Australia could help you to improve your financial situation and potentially save you big dollars.
Overview
- What is debt consolidation?
- Impact of debt on households
- What to know before consolidating debt
- 3 best ways to consolidate debts
- Is consolidating debt a good idea?
- Is there a downside to consolidating debts?
- When you should consolidate debt
- Who to speak to about debt consolidation
What is debt consolidation?
When you consolidate your debts, you combine multiple loans into one simple payment. So you don’t have to manage multiple payments coming out of your bank account at different times. Instead, you only pay the interest and fees on a single loan instead of several at once.
Find out more: What is Debt Consolidation?
Impact of debt on households
If you find yourself in debt that feels overwhelming, you’re not alone. According to ABS data, 75% of households had debt in 2019-2020. And of those, 30% of households had a debt three or more times their annual disposable income
If you find yourself in an overwhelming debt situation, don’t despair. You can break the cycle and get out from under this burden. Below we explore 3 ways in which you could find financial freedom.
What to know before consolidating debt
Before you sign any debt consolidation loan agreement, carefully consider your situation and make sure you can answer the following questions:
- Why are you consolidating your debt and does the loan agreement meet those needs?
- What will the interest rate be?
- Are there any additional fees you will need to pay? (e.g. early exit fees)
- What is the overall cost of refinancing?
- Does the loan rate, terms and conditions, and fees suit your situation?
How to consolidate debts: 3 best ways
We’ll take you through our 3 best ideas on how to consolidate debts and get your finances back under control.
1. Home Equity Loan
One of the ways you might consider getting your debt under control and paid off faster is by taking out a home equity loan. If you are lucky enough to have owned your house for a bit and the house is worth more now, then you might be able to take advantage of a very cost-effective way to pay off your other debts.
But let’s break down the pros and cons of pursuing a home equity loan for debt consolidation to save money.
Pros |
Cons |
| Repayment should be more manageable. | Mortgage payment will increase. So make sure you can pay it (keep in mind it should be easier to do that since your other debts will be paid off), you certainly don’t want to go into default on your mortgage. |
| Interest rate should be lower than other options. It also should reduce your overall interest payments since you won’t be paying the higher interest that credit cards and other bad debt might have. | You will incur additional interest with the larger mortgage payments and/or longer term. |
| One monthly payment that takes care of your mortgage and your debts. It should help your finances. |
Overall, this could be a good option for some people if you meet all the criteria and can get a good rate (and not pay a bunch of fees) to help make your debt more manageable.
2. Credit Card Transfer
How to consolidate credit card debts
If you are juggling several credit card balances and want to consolidate debt without a loan you might be able to do it with a credit card. Instead of paying for three or four credit cards, it might be easy to take advantage of a balance transfer offer on a new card. Or you might be able to take up an offer from a card you already have.
The advantage of these offers is that you’ll be able to put all of your money towards paying off the debt. Because there is typically zero interest on these offers for a certain number of months. Of course, you have to make the minimum payments on time during this period to keep it in place.
Keep in mind that if you pursue this option then you’ll need to discipline yourself to pay a certain amount every month that will make sure you pay off the entire balance before the interest-free period ends.
3. Debt Consolidation Loan
Depending on how much debt you have, you might consider using a debt consolidation loan to save money. Consolidating all your small debts into one loan should give you a chance to get out of debt in a set amount of months. And instead of managing lots of payments, you will make one simple payment every month.
The great part about a debt consolidation loan is the knowledge of exactly when you’ll pay off the loan. So you know when you’ll be able to celebrate your financial freedom.
How to get a debt consolidation loan with bad credit
Bad credit loans are one option for consolidating your debt. They are designed to suit a wide range of credit ratings, even those with bad or very bad credit. Approval criteria tend to be simpler for these types of personal loans, but the interest rate is usually higher as well. So make sure you understand what you will be paying before you sign any loan agreement.
How to refinance debt consolidation loans
Once you’ve consolidated your debt you may find you need a little extra cash later down the line. As long as you’ve been keeping up with your loan payments and you haven’t applied to refinance too soon, you should be able to get refinanced. You can apply to refinance your loan, get extra money, and still keep your payments consolidated.
Is consolidating debt a good idea?
Consolidating debts can be a good idea if you are struggling to make repayments on time and missing payments. By only having one payment you need to keep track of, you are less likely to miss a payment and can more easily maintain or improve your credit rating. It can also be a good idea if the interest you pay is less than the individual interest paid across multiple loans.
Be aware that consolidating your debts does not guarantee you will pay less on interest. Although, if it helps you to manage your debt better, it may still be worth it to you to use a debt consolidation loan. Always check what the interest rate is and how much you will be paying before making any decisions.
Debt consolidation can be beneficial for the following reasons:
- Combine multiple debts into one payment
- Easier to manage and keep track of payments
- You may pay less interest
- Can improve your credit score over time (depending on the lender and how well you manage the new debt)
- Option to move to a different lender if you are unhappy with your current one
Is there a downside to consolidating debts?
Refinancing is not always the right financial decision for everyone. Some potential disadvantages of a debt consolidation loan are:
- You may end up paying more interest
- The duration of your loan might be extended
- You might have to pay extra fees
- Missed payments will harm your credit rating
When you should consolidate debt
When you go about it the right way, refinancing can save you time, effort, and money. But if you don’t review your options carefully, you may end up paying more on your interest than if you had stuck with your first arrangement.
So, here’s when it could be a good idea for you to consolidate your debts:
- You want to simplify your payments
- You don’t like the lender you’re currently with
- It’s costing you more to be paying multiple interest rates
- You want to refinance an existing loan for a better rate or benefits
- You’re starting to lose track of outgoing funds and missing payments
Who to speak to about debt consolidation
There are plenty of places to turn to if you need some more hands-on help to learn how to consolidate debts or to manage your debt better. Government resources, charities and not-for-profits, and financial advisers like brokers can all help you find a financial solution.
Here are some useful resources to get you started on your debt consolidation and management journey:
- Consolidate Your Loans – National Debt Hotline
- Free support to manage your debts – Way Forward charity
- Financial counselling – MoneySmart
- Managing debt – MoneySmart
- Dealing with debt – Australian Financial Security Authority
