A Guide To Debt Consolidation Loans

If you’re stressing about the rising cost of living, debt consolidation loans may be on your radar. But before you take the leap – and potentially end up with more debt than you have now – it’s important to understand the pros and cons of debt consolidation home loans. Then you can decide if it’s the best choice for you.

How do you consolidate debt?

This is usually done by rolling multiple smaller debts at higher interest rates into your home loan. These smaller debts – at higher interest rates – can include:

• Car loans.

• Personal loans.

• Credit Card balances.

• Late utility and phone bills – including any interest owed.

• Buy Now Pay Later (BNPL) agreements – which are also credit contracts.

• Mobile phone contracts.

Can you consolidate debt into a home loan?

Yes. In fact, this how a debt consolidation is usually done. 

What is a debt consolidation loan?

Debt consolidation is when you take out one large loan to repay a collection of smaller ones. It’s different from refinancing, which is where you replace or extend an existing loan.

If you’re facing a range of repayments on different dates, from different institutions, you might find it difficult to keep all your bills straight. Home loan, credit cards, car loan, personal loan for a holiday, buy now pay later agreements, etc. It’s a lot to deal with.

A debt consolidation loan could make your repayments easier to manage.

Is debt consolidation better than refinancing?

When it comes to debt consolidation vs refinancing, they aren’t all the different. 

Debt consolidation involves merging multiple debts into a single one for ease of management and potential cost savings. 

Refinancing, on the other hand, replaces an existing debt with a more favourable one, often at with a different lender, with potential benefits like lower interest rates or fees, leading to potential long-term savings.

Often, the two strategies are used in combination with one another.

What are the pros and cons of debt consolidation?

The Pros:

• a lower fortnightly or monthly or fortnightly payment to help you budget better.

• all your debts in one place means fewer repayments to stress over.

• potentially saving money by getting rid of your higher interest rate loans by rolling them into one with a lower overall rate.

• stretching the life of your debt could mean smaller monthly repayments to get you some cashflow relief.

The Cons:

• by giving just one creditor all your debt, they wield a lot of power over you – and that can make negotiations over any missed repayments and extensions you may need challenging. 

• consolidating your debts could mean it costs you more in the long run because your home loan can be extended for a longer period. Working with a good broker can help ensure your loan term is kept the same.

• depending on your circumstances, your costs for setting up a new loan and exiting old ones can add up.

• if your debt consolidation rolls old debt into your mortgage, any co-borrower attached to your home loan is now taking on your old debts.

• there may be penalties or fees associated with paying out other debts.

How does debt consolidation work?

Debt consolidation can be an easy three-step process that’s as simple as:

• taking out a new home loan.

• using the new loan to clear old debts.

• paying off the new loan.

When it works well, the benefits are measurable. 

This is easiest to demonstrate via a real-life case study. One of our mortgage brokers reported this example of a recent client’s debt consolidation that created significant savings:

1. Client owed $173,000 on their mortgage with repayments of $1538 @ an interest rate of over 7.75%.

2. They owed another $33,000 on their credit cards, with monthly repayments of $1050.

Total monthly outgoings = $2588

Our broker refinanced all their debt into a debt consolidation loan. 

Total loan amount: $206,000 – keeping their loan term the same as it was before but with a new interest rate of 5.29%.

Their total monthly home loan repayment = $1533 and they no longer have any credit card debt.

Our client is $1055/month better.

Things to check before agreeing to debt consolidation:

• Is the new offer for your debt consolidation from a lender that is Australian Securities and Investments Commission (ASIC)-registered and licensed?

• Will the interest rate on offer for one debt consolidation loan add up to less than your combined loans?

• How much are the fees and charges?

• Are you putting your home or other significant assets at risk?

• Will anyone else be affected?

• What steps are you taking to avoid adding further debt?

Speaking to a financial counsellor before you sign on the dotted line is highly recommended.

For borrowers who have several high-interest loans, debt consolidation can be a good idea. But looking to it as a magic fix is never a good idea, unless you tackle the issues that are causing your debt issues in the first place. 

Sources:

What is the difference between debt consolidation & refinancing, Peoples Choice

Should you consolidate your debt when refinancing your home, Domain

Debt Consolidation, Fox SymesThe Pros & Cons of Debt Consolidation, Compare Club

Debt Consolidation & Refinancing, Money Smart

This guide is opinion only and should not be taken as financial advice. Check with a financial professional before making any decisions.

Anthony Stevenson, is the head of home loans at Compare Club. With over a decade of experience under his belt, Anthony is dedicated to helping individuals make informed decisions when choosing a home loan. Whether it's finding the best deals on your home loan or refinancing, Anthony has a wealth of knowledge in the space.

Meet our home loans expert, Anthony Stevenson

Anthony's top home loans tips

• 1

  Refinancing is the smartest, fastest way to lower your repayments and give yourself some breathing room.

• 2

  There’s more to a good value home loan than just interest rates. Are you paying high account keeping fees, or being charged for making extra repayments?

• 3

  Pre-approval and unconditional approval of your home loan are different parts of the same process. Our expert brokers cut through the jargon for you.

• 4

  Home loan pre-approval is not compulsory. It’s possible to begin your home loan application after you’ve found the home you want to buy.