The short version
- Debt consolidation rolls several debts into one loan with one repayment.
- It only saves money if the new loan's comparison rate and fees are lower than what you pay now.
- Close or cut the limits on cards you pay off, so the old debts don't build up again.
How debt consolidation works
You take out one new loan, use it to pay off your credit cards and other debts, then make a single repayment each month. Instead of several rates, due dates and sets of fees, you have one of each. If the new loan's rate is lower than what you pay now, you save interest and may become debt free sooner.
It works best with a plan: close or reduce the limits on the cards you've paid off, so the old debts don't build up again alongside the new loan.
What you can consolidate
Lenders set their own rules, so ask before you apply. Most will pay out:
- Credit card and store card balances, usually the most expensive debts.
- Other personal loans, such as car, medical, renovation or wedding loans.
- Buy now pay later balances and overdrafts.
Debts that usually stay separate
- Your home loan. To roll other debts into it you'd refinance or top up the home loan instead, covered under other options below.
- HECS-HELP and other government study loans. They're repaid through the tax system, are indexed rather than charged interest, and are usually worth leaving alone.
Secured or unsecured
Most debt consolidation loans are unsecured, so no asset is at risk, but rates are higher and lenders look harder at your credit history. A secured loan, backed by a car or other asset, usually has a lower rate, but the lender can take the asset if you can't repay.
Fixed or variable rate
A fixed rate keeps your repayments the same for the whole loan, which makes budgeting easier, but there may be a fee to repay early. A variable rate can go up or down with the market, and often lets you make extra repayments for free, which can help you clear the debt sooner.
When it doesn't save money
Consolidating can cost more if the new loan's term is much longer than your current debts, if fees eat up the interest saving, or if the old cards fill up again. Add up the total cost of both options, not just the monthly repayment.
Look at the comparison rate as well as the interest rate. The comparison rate adds the lender's standard fees to the interest rate for an example loan, so it shows the cost of two loans on the same footing.
Pros
- One repayment. One date and one amount are easier to manage than several.
- Often a lower rate. A personal loan's rate is usually lower than a credit card's, so more of each repayment clears the debt.
- A set end date. Unlike a card, the loan is paid off by the end of its term if you keep up the repayments.
Cons
- It can cost more. A longer term or a high setup fee can mean paying more interest overall, even at a lower rate.
- The old limits stay open. If you keep using the cards, you end up with the loan and the card debt.
- Another application. A new loan adds an enquiry to your credit report.
What you'll need to apply
Each lender has its own requirements, but have these ready:
- Proof of identity, usually 100 points of documents such as a passport, driver's licence and Medicare card.
- Proof of income, such as your latest payslips.
- Proof of address, such as a bill, lease or bank statement in your name.
- Statements for each debt you want to pay out, showing the balance and account details.
- Details of the asset, if you're applying for a secured loan.
Other options
- A balance transfer credit card can give you months at 0% interest on card debt, and some take personal loan balances too. A high rate applies to whatever is left when the offer ends.
- Refinancing your home loan can free up equity to pay debts at a home loan rate, though spreading short term debt over 25 years can cost more in total.
- If you're struggling with repayments, the free National Debt Helpline (1800 007 007) can help you work out your options.