What debt consolidation is · consolidate.au

The words, plainly

Debt consolidation: Rolling several debts into one new loan, then making one regular repayment to one lender.
Refinancing: Replacing or extending an existing loan with a new one, from the same lender or another. Consolidation can be done this way, by refinancing all the loans into one new loan.
Unsecured and secured debt: Credit cards and personal loans are the examples Moneysmart gives of unsecured debts. A secured debt is backed by an asset you offer as security, such as your home or car, and if the loan is not repaid the lender can sell that asset to recover what it lent.

Moneysmart lists the kinds of debt people might consolidate: credit cards, personal loans, store cards, buy now pay later and car loans.

When it may help

Moneysmart puts the test as four conditions. Consolidation or refinancing may help when:

You pay less overall. The new loan’s rate and fees come in below those of the current debts.
There is a clear end date. The new loan runs no longer than the current debts would.
You can afford the repayments. The new repayment sits within your budget, and you can keep it up.
The old credit stops. Old credit cards and other loans are closed or reduced, and no new debt is taken on.

If some of these things are not true, Moneysmart says consolidation can make a situation worse, not better. It also notes that more credit can draw people deeper into debt, because it may tempt them to spend more.

Where it goes wrong, strand by strand

The National Debt Helpline lists the main risks of a consolidation loan. In its order, in summary:

Longer to pay off. The Helpline calls this the main downside: a consolidated loan usually takes far longer to pay off, so it can end up costing more.
Fees, charges and interest rates. Check the fees, charges and interest rate of the new loan. The Helpline says it may work out more expensive in the long run than simply continuing to pay off the separate debts.
Unsecured into secured. The asset given as security, such as a home, is on the line if things go wrong, and short-term debt may become long-term debt. Where the home is owned jointly with someone else, you may have to pay the debt if they cannot.
Single debt into joint debt. Take care, and make certain you do not take on a partner’s debts in a debt consolidation. With a joint debt, the Helpline warns, you may end up repaying all of it.
Only one lender to negotiate with. If money gets tight again, there is one lender to talk to, not several.
“Government backed schemes”. Some offers described as consolidation are a Part IX debt agreement under the Bankruptcy Act. The Helpline says these have serious consequences, are usually expensive, and should always be discussed with a financial counsellor first.

It also makes a point that is easy to miss: someone already in financial hardship usually will not be able to get a loan to consolidate, because they are already struggling to make repayments.

Before comparing a new loan

Moneysmart’s checklist starts with the debts already held. For each one: the balance, the current interest rate, the fees (including any penalty for paying the loan off early), the remaining term and the current monthly repayment.

Then, for the new loan, it lists what to find out: the interest rate; all fees and charges, including application, legal and valuation fees and stamp duty, which some lenders charge when the new loan is secured; the term; the repayment amount and frequency; whether the rate is fixed or variable; and whether extra repayments can be made without penalty. The National Debt Helpline’s version is shorter: compare the total repayments on the current loans, ongoing fees included, with the total repayments on the new loan, set-up costs and ongoing fees included.

Moneysmart’s third step is to stress-test the budget: check that the new repayment can still be met if interest rates rise, income drops or living costs go up.

Its fourth step is “Be honest with yourself”, by answering three questions truthfully:

Will I close my old credit cards and other debts?
Will I stay away from applying for any other credit?
Do I have the discipline to keep up this one regular repayment?

Moneysmart adds a caution about moving to a loan with a longer term: the rate may be lower, yet the interest and fees paid over time could come to more.

Offers that promise too much

Moneysmart warns that some companies advertise they can get people out of debt no matter how much they owe, which may be unrealistic. It says: don’t trust a company that is unlicensed, wants you to sign blank documents, will not talk about repayments, hurries the deal along, will not set out every loan cost and the interest rate in writing before you sign, or tries to arrange a business loan when a basic consumer loan is all that is needed.

The National Debt Helpline warns of debt consolidation scams in which people pay set-up fees and never get a loan, and says credit providers and brokers that are not licensed, or not authorised representatives of a licensee, are operating illegally in Australia. Both point to ASIC’s Professional Registers Search to check a licence.

Other paths Moneysmart lists first

Before paying a company to consolidate or refinance, Moneysmart says to consider the other options first. Its list, in its order:

For a mortgage, talk to the lender as soon as possible and ask for its hardship team, which may be able to change the loan term or reduce or pause repayments for a while.
Consider switching home loans. Moneysmart says a different home loan could save on interest and fees, but to make sure it really is a better deal.
For credit cards and other loans, ask the lender whether repayments can be changed or the loan extended.
Consider a credit card balance transfer, which Moneysmart says can help and can also create more problems.
Talk to a free financial counsellor, who can explain the options and help make a plan.
Look into free debt management support. Moneysmart names a not-for-profit that sets up affordable debt management plans for people in long-term financial hardship.
If facing legal action, contact a community legal centre or Legal Aid office, where free legal advice is available, straight away.

The National Debt Helpline adds that reaching agreements with existing lenders usually leaves people better off, because refinancing costs money. The next guides go into asking a lender for hardship help and how a longer loan can cost more.