Debt consolidation: is one loan the answer?

Debt consolidation is one of my favourite things to help with. When it’s done well, people go from juggling five due dates to one, with a clear finish line.

But it isn’t right for everyone. Here is how it works, and the questions I’d ask first.

How it works

You take out one new loan, usually a personal loan. The money pays off your other debts, such as:

• Credit cards
• Store cards and buy now pay later
• Personal loans
• Sometimes a car loan

Then you make one repayment each week, fortnight or month, until the new loan is paid off.

When it can help

• One repayment. One amount and one due date are much easier to budget for.
• A finish line. A personal loan has a set term. Credit cards don’t, so the debt can drag on for years.
• It can cost less. If the new loan has a lower rate and lower fees than your current debts, you can pay less overall.

When it may not help

• A longer term can mean more interest overall. Lower repayments over a longer time can cost more in total, even at a lower rate. Moneysmart shows how a $20,000 debt at a lower rate, spread over a much longer term, can end up costing thousands more.
• Fees. The new loan may have an establishment fee. Some old loans charge a fee to pay them out early.
• The cards fill up again. This is the big one. If the paid-off cards stay open and get used again, you end up with the new loan and the old debts.
• Security. If the new loan is secured against your car or home, you could lose it if you can’t make the repayments.

Questions to ask before you consolidate

1. What’s the total cost? Compare what you’d pay in total (interest and fees) on your current debts with the new loan.
2. What’s the comparison rate? It includes most fees, so it’s a fairer way to compare loans than the interest rate alone.
3. Can I afford the repayments every time, even in a tight month?
4. What happens to my cards? Plan to close them or cut the limits.
5. Are there fees to pay out my current debts early?

Red flags

Walk away from anyone who:

• Isn’t licensed. You can check on ASIC’s Professional Registers.
• Asks you to sign blank or incomplete documents
• Rushes you, or won’t talk about the repayments
• Won’t put the rate and all the costs in writing before you sign
• Sets you up with a business loan when you only need a personal one

If you’re struggling now

If you’re already behind on repayments, a new loan may not be the first step. People in financial hardship often can’t get a consolidation loan, and it may not help anyway.

• Talk to your lenders. If you’re in financial hardship, you can ask them for help, such as a pause or lower repayments for a while.
• Get free help. The National Debt Helpline is a free, confidential service. Call 1800 007 007 or visit ndh.org.au. If it’s your business that’s struggling, the Small Business Debt Helpline is free too: 1800 413 828.
• Be careful with debt “fixers”. Some companies charge high fees for things you can do yourself for free. Any business that charges to deal with your creditors needs a credit licence, so check it on ASIC’s Professional Registers before you sign anything.
• A debt agreement is not a loan. It’s a formal arrangement under bankruptcy law, and it stays on your credit report for years. Get free help before you agree to one.

How I help

My background is in financial planning, so I like to look at the whole picture, not just the loan. I’ll list your debts, compare options from my lenders, and show you the total cost both ways. Then you decide.

If one loan isn’t the right answer for you, I’ll tell you.