Debt Consolidation

Debt consolidation combines several loans into a single loan, usually your home loan. Typically, this will include combining unsecured debts such as personal and car loans, credit card balances and store card balances into your home loan – which is secured debt – that which is secured by your property.

Benefits of Debt Consolidation

The most common reason that people consolidate debt is to reduce the interest cost and payment amounts. The typical benefits of debt consolidation can include:

  • Reduced monthly repayments
  • Lower interest rate on repayments
  • Only one creditor
  • Less fees and charges
  • Less paperwork
  • The chance to get back in control of your debts
  • Extended repayment period

The biggest single issue with debt consolidation is that your debt is now ‘secured debt’, so if you don’t pay it back, you risk losing your ‘security’ – your house. Other typical consideration points with debt consolidation include:

  • Your debt may take longer to pay off and cost more because of the longer period of time you have to pay it off.
  • It may affect any future loan applications.
  • You may need to provide extra security for your loan.
  • There may be fees and charges associated with setting up your debt consolidation.
  • If you fail to meet repayments, your property may be at risk
  • If you don’t cut up your credit cards, you have essentially freed up your credit card to accumulate more debt.

A Debt Consolidation Case Study

Bob and Claire both work full time with average incomes of $65,000 and $40,000 respectively. They have 2 children. They purchased their home 3 years ago for $230,000, but it is now worth $380,000.

Currently, Bob and Claire are paying off the following debts:

Item Amount Owing Monthly Repayments
Home Loan $205,000@8.07% p.a. $1,592
Personal Loan $28,000@11.5% p.a. $731
Credit Cards $6,300+$8,900 $600
Interest-free Cards (past interest-free period) $6,500@26% p.a. $400
TOTAL DEBT $254,700
TOTAL MONTHLY REPAYMENTS $3,323

Bob and Claire refinanced and consolidated all of their debt into a $260,000 basic variable home loan at 8.25% p.a. over 25 years, with the option of redraw.

NEW Total Monthly Repayments = $2,050

Tips for reducing debt

  • Complete a budget so you know how much you have to spend every month – if you have a budget you are more likely to be successful at managing your debt. Use our handy budget planner.
  • Choose the right kind of credit facility for your needs, be it a credit card, a personal loan, a store card or a debit card.
  • Minimise the number of credit facilities you have eg. keep one credit card only, not three or four.
  • Shop around for a good deal on your credit facility as interest rates, fees and charges can vary widely.
  • Resist the temptation to increase your credit limit or the number of credit facilities you have.
  • Always pay at least the minimum balance every month, but preferably the entire due amount.
  • Never ‘max out’ your credit facility.

For more information on debt consolidation

Debt consolidation should not be seen as a ‘complete fix’ and in fact will not work in the long term if you do not address the underlying reason behind your out-of-control debt.

To talk through your options, contact your local Loan Market mortgager broker for a confidential, no-obligation appointment by calling us at any time on 0508 722 205 (+64 9 377 7347).