Will consolidating my debts help?

Key message

Get advice about all your options before:

  • taking out a new loan to pay all your existing loans
  • taking out a loan to consolidate your debt

For free, independent and confidential financial counselling, call MoneyHelp service on 1800 007 007.

What is involved in consolidating debts?

Lenders offer a range of refinancing and consolidating loans to people with debts.

Refinancing means you get a new loan to pay out an existing loan.

Consolidating is a type of refinancing that usually means getting a new loan to pay out a number of other loans.

Many home loans have an option that allows the loan to be extended to consolidate other debts.

The most common reasons people consolidate debts are to:

  • Reduce monthly debt payments,
  • Manage one debt instead of having a number of debts,
  • Save money by getting a consolidation loan with a lower interest rate to pay off debts with a high interest rate.

Debt consolidation rarely saves you money. In most cases, debt consolidation is more expensive than keeping your loans as they are. Avoid debt consolidation companies as they usually charge exorbitant fees.

It can put you, co-borrowers and other people who guarantee your loan, at increased financial risk.

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Should I refinance my home loan?

If you want to include all your debts in your home loan it will probably be cheaper to extend the length of your current mortgage than to refinance.

A new personal loan to pay out other debts will have a higher interest rate than your home loan and will likely have establishment and other start up fees.

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Will consolidation save money?

In most cases, consolidating won’t save you money. If a new loan has a lower interest rate than the interest rate on your largest loan, then it might save you money to consolidate. But the cost of establishing the new loan, combined with early payment fees on your old loan, is usually higher than any savings you make on interest charges.

Talk through your options with a financial counsellor before making a decision.  MoneyHelp can be contacted on 1800 007 007.

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Should I use a guarantor or co-borrower?

If you don’t own a house, a lender might offer you a consolidation loan if someone else, usually a family member or friend, signs as a guarantor or co-borrower.

If you do not keep up with payments it can lead to the guarantor or co-borrower losing their home. Get advice about other options first.

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Can I cut years off my mortgage?

There is no magic loan that cuts years off your mortgage or debts. For most people, the best debt reduction strategy is to:

  • Stop using more credit,
  • Continue paying your mortgage,
  • Pay as much as you can towards your non-mortgage loans,
  • When other debts are paid out, pay those extra funds towards your mortgage.

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What are my other options if I do not want to refinance or consolidate my debts?

Your options will depend on what your main aim is and what constraints you have. If you have no assets, you may consider bankruptcy. If you have a mortgage, you may consider a Part IX Debt Agreement. Talk through your options with a financial counsellor before making a decision.  MoneyHelp can be contacted on 1800 007 007.

I want to pay off my debts off sooner

  1. Work out how much money you can allocate to your debts each month.
  2. Apply any excess funds to the most expensive debt, usually your credit card.
  3. When that debt is finalised, apply the excess to the next most expensive debt.
  4. Eventually you will probably be left with your home loan and you will be allocating all excess funds to it. This will reduce the term of your home loan.

I hate having so many debts

Consider easier ways of managing payments. Consider using bill payment services offered by your credit union or Australia Post that allow you to make one monthly payment.

I cannot pay one or more of my debts

Debt consolidation is not reversible, so always start by seeking advice from a financial counsellor about your debt problems.

If you are having particular problems with one debt, for example threatened legal action or harassment by debt collectors, you should access free legal advice about your rights.

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