Several Debts, One Repayment: Check the Numbers First
Debt Consolidation Loans in Australia: Your Options and When They Pay Off
A personal loan, a balance transfer or your home loan can roll several debts into one repayment. Each can cost less or more than what you pay now. Here is how to tell.
A debt consolidation loan is a new loan that pays out several existing debts, leaving you with one repayment to one lender. It saves money only if the total you repay, fees included, comes out lower than what you would have paid anyway, and a lower rate over a longer term can cost more.
In Australia there are four main routes: an unsecured personal loan, a secured personal loan, a credit card balance transfer, or rolling the debts into a home loan. If you’re already missing repayments, a new loan may not be the answer at all.
One thing up front. Mortgage World Australia is a mortgage broker, so home loans are what we arrange ourselves. If a personal loan is what you want, through our relationship with a firm that solely specialises in asset finance and personal loans, we can assist you with that too, and the section on how we fit in explains how.
What is a debt consolidation loan?
The debts Moneysmart lists as ones you might consolidate are credit cards, personal loans, store cards, buy now pay later and car loans.
There is no special product behind the name. A loan sold as a debt consolidation loan is usually a personal loan used to pay out other debts. An unsecured personal loan is one where you don’t put up an asset, and those loans usually carry a higher rate than secured ones. A secured consolidation loan, or a home loan top-up, puts your car or home at risk if you can’t repay.
Either way the debt doesn’t shrink. You still owe the full amount, plus whatever the new loan costs to set up.
When a debt consolidation loan pays off, and when it costs more
Moneysmart sets out four conditions. Consolidating may help when all of these are true:
Miss one and you can end up worse off. The term is where most people get caught, because a smaller repayment feels like a saving. Moneysmart’s worked example puts the same $20,000 debt at three different rates and terms:
| Interest rate in Moneysmart’s $20,000 example | Paid off over | Total cost of the loan |
|---|---|---|
| Highest of the three | 5 years | $25,496 |
| Middle | 10 years | $29,119 |
| Lowest of the three | 15 years | $30,379 |
The rate falls and the repayment falls, yet the lowest rate costs $4,883 more in total than the highest, before any fees. These are Moneysmart’s figures, not offers from us or any lender, and its page shows the rates it used.
Security is the other trade-off. A lower rate often comes from putting up an asset such as your home or car, and if you can’t repay, the lender can sell it. Moneysmart’s advice is to consider all your other options first, and we agree.
Your options at a glance
| Option | How it works | What is at risk | Where the cost hides |
|---|---|---|---|
| Unsecured personal loan | A new loan pays out your debts, usually over one to seven years | No asset is put up, but the lender can take legal action to recover the debt | Usually a higher rate than secured lending, plus any establishment and early repayment fees |
| Secured personal loan | The same, with an asset such as a car as security | The asset, which the lender can take and sell | Fees, and a longer term if you stretch it |
| Credit card balance transfer | Card debt moves to a new card on a low or zero promotional rate, usually for 6 to 24 months | No asset is put up | A one-off transfer fee, and a higher rate on what is left when the offer ends |
| Home loan top-up or refinance | The debts are added to your mortgage | Your home | A long term can cost more in total, even at a lower rate |
Unsecured personal loans for debt consolidation
A personal loan for debt consolidation is what most people mean by the term. You borrow a set amount, pay out your debts and repay over a set time, usually one to seven years according to Moneysmart’s personal loans guide. Because no asset is put up, it is an unsecured debt consolidation loan, and if you don’t repay, the lender can still take legal action to recover the money.
Before you commit, check the comparison rate as well as the interest rate, every fee including early repayment, and the rate actually offered to you, which may differ from the advertised one.
Moneysmart’s personal loan calculator will estimate your repayments and how different loans change the total cost before you apply. It leaves out establishment and account fees, so add those yourself.
How Mortgage World Australia fits in
We arrange home loans and compare them across 52+ home loan lenders.
A home loan won’t suit everyone. Through our relationship with a firm that solely specialises in asset finance and personal loans, we can assist you with a personal loan to consolidate your debts, or a car loan. Tell us what you need, and we’ll have a specialist contact you.
Credit card balance transfer
A balance transfer moves debt from high-interest cards to a new card on a low or zero promotional rate, usually for 6 to 24 months. It suits card debt you can realistically clear before the offer ends, and you apply directly with the card provider.
The traps are in the conditions:
Cancel the old card once the balance has moved. If you’re already struggling with card repayments, a balance transfer might not be right for you.
Rolling debts into your home loan
Home loan pricing is generally well below personal loan pricing, and this is the route we arrange directly. The catch is that short-term debt becomes long-term debt secured against your home, so the total can be higher even at the lower rate.
When a homeowner is leaning towards a personal loan because it feels simpler, we start by confirming usable equity with a valuation, then work out the home loan’s total cost so you can put it beside the personal loan quote you have. Our debt consolidation home loan guide covers when it works, when it costs more and how to structure it.
Debt consolidation with bad credit
A bad credit history doesn’t automatically rule out a consolidation loan, but it makes approval less likely and the numbers harder to justify. A lender may reject your application because of late or missed repayments, unpaid debts, a default or many recent applications, and it must decline if its assessment shows the loan could cause you hardship.
The rate you’re offered may not beat what you pay now, so run the four conditions above before you apply.
Three things to do first:
Be wary of ads that promise approval whatever your history. The National Debt Helpline warns of consolidation scams where you pay set-up fees and never get a loan.
If you own property, a near-prime or specialist home lender may consider a home loan that consolidates debts even with defaults on file. Expect a higher rate than a mainstream home loan, and the debts then sit against your home. Moneysmart warns that lenders advertising to people with bad credit may charge high interest and fees, and says to check the lender is a member of AFCA. Our guide to home loans with bad credit explains how lenders treat defaults.
How to check a consolidation loan works for you
This is Moneysmart’s method:
Then add up the total repayments on both sides, set-up costs and ongoing fees included, as the National Debt Helpline’s checklist suggests. If the new loan isn’t cheaper in total, you’re paying for convenience.
If you plan to buy or refinance soon
A new loan repayment counts against your borrowing power. So do your cards: lenders generally work from a credit card’s full limit, not its balance. We have seen one car loan take about $200,000 off what a couple could borrow for a house. We have also seen a client get the extra he needed by closing a $10,000 card. If a home purchase is on the horizon, talk to a broker before you sign a personal loan.
When none of these fit
If you’re struggling to meet repayments now, a new loan usually isn’t the first step. The National Debt Helpline says that in financial hardship, you usually won’t be able to get one anyway.
Start with your lender’s hardship team. Your lender must consider you for hardship assistance, which can mean a payment plan or changed repayments, and that the earlier you ask, the more options you’ll have.
Then call the National Debt Helpline on 1800 007 007. Moneysmart describes it as a free and confidential service staffed by financial counsellors, open Monday to Friday from 9:30am to 4:30pm, with live chat until 8pm. The helpline says its counsellors don’t lend money or sell you anything. Moneysmart also lists Way Forward, a not-for-profit that arranges debt management plans, on 1300 045 502.
A debt agreement, also called a Part IX, is a formal option under the Bankruptcy Act that the Australian Financial Security Authority says may be a suitable alternative to bankruptcy. It is not a consolidation loan or an agreement to borrow money, and it can affect your ability to get credit. Mortgage World Australia doesn’t arrange debt agreements. The helpline warns they have serious consequences and are usually expensive, so speak to it before you sign one.
Whoever you deal with, check they are licensed on ASIC’s Professional Registers. Moneysmart warns against any company that promises to clear your debts no matter how much you owe, or won’t put the costs and rate in writing before you sign.
Talk to us
Tell us roughly what you owe, who you owe it to and whether you own property. We’ll talk through whether a home loan is worth looking at, whether a personal loan suits you better, or whether you’re better off calling the helpline first. Use the form on this page, call (02) 8004 7459 or go to our contact page.
This article contains general information only and does not constitute financial advice. Your personal financial situation, objectives and needs have not been considered. Before acting on any information, you should consider its appropriateness to your circumstances. Speak to a qualified mortgage broker for advice tailored to your situation. Mortgage World Australia Pty Ltd is a credit representative (CR No. 396946) of Mortgage Specialists Pty Ltd (ACN 612 422 178, Australian Credit Licence No. 387025).