The example, in full
Moneysmart describes a $20,000 debt refinanced to a lower interest rate over a longer term, and says this will reduce the weekly repayments but could increase the total cost. Its three rows are below. The monthly repayment and interest columns are not on Moneysmart’s page: this guide worked them out, as explained underneath.
| Rate | Paid off over | Monthly repayment | Total cost of loan | Of which interest |
|---|---|---|---|---|
| 10% | 5 years | $424.94 | $25,496 | $5,496 |
| 8% | 10 years | $242.66 | $29,119 | $9,119 |
| 6% | 15 years | $168.77 | $30,379 | $10,379 |
10% over 5 years · $424.94 a month
8% over 10 years · $242.66 a month
6% over 15 years · $168.77 a month
How the arithmetic was done
The repayments assume the loan is paid in equal monthly amounts, with interest worked out monthly at one twelfth of the yearly rate, and no fees. This guide used the formula for equal repayments on an amortising loan, and it reproduces Moneysmart’s three totals to the dollar: 60 payments of $424.94, 120 of $242.66 and 180 of $168.77. Interest is the total minus the $20,000 borrowed. Real loans can carry fees and may have different repayment schedules, so treat this as a way to see the shape of the trade, not as a quote.
Read down the table and two things move in opposite directions. The monthly repayment falls by more than half between the first row and the last. The interest nearly doubles. Nothing about the debt changed except the rate and the time.
Why time outweighs the rate here
In this illustration, stretching the loan from five years to fifteen keeps a balance owing for ten more years, and the lower rate does not make up for that. Moneysmart’s own warning is direct: take care before moving to a loan with a longer term, since a lower rate can still mean paying more in interest and fees over time.
The National Debt Helpline puts it the same way from the other end. It calls a longer repayment period the main downside of a consolidated loan, and says consolidation usually takes much longer to repay, so it may cost more in the long run.
When short debts become long ones
The Helpline gives a sharper case: increasing a home loan to pay out credit card debts. That turns unsecured debt into secured debt, and it can turn short-term debt into long-term debt, with the home as security if things go wrong. Moneysmart says that if a secured loan is not repaid, the lender can sell the asset to get back the money it lent, and suggests considering all the other options before using a home or other assets as security.
The costs that are not in the rate
The example above has no fees. Real consolidation loans can carry them on both sides of the switch. On the old debts, Moneysmart suggests noting any penalties for paying a loan off early. On the new loan, it lists application fees, legal fees, valuation fees and stamp duty, which some lenders charge when the new loan is secured. The Helpline’s comparison is total against total: everything still to be paid on the current loans, ongoing fees included, against everything to be paid on the new one, set-up costs and ongoing fees included.
A short checklist from the sources
List what is owed now
For each debt: balance, interest rate, fees and early-payout penalties, remaining term and monthly repayment.
Find the whole cost of the new loan
Rate, all fees and charges, term, repayment amount and frequency, fixed or variable, and whether extra repayments can be made without penalty.
Compare totals, not repayments
The National Debt Helpline’s test: total repayments now against total repayments under the new loan.
Check the end date
One of Moneysmart’s four conditions is that the new loan term is not longer than the current debts.
Stress-test the budget
Would the repayment still be affordable if rates rose, income dropped or living costs went up?
Moneysmart points to its personal loan calculator to work out the real cost of loans, and says a free financial counsellor can explain the options and help make a plan. How free financial counselling works.