What is debt consolidation and is it a good idea?

If you've got debts following you around like a bad smell.. debt consolidation could be your secret weapon

What's the key learning?

Debt consolidation is the act of combining several loans into one new loan
It can be helpful for people who’ve got multiple debts like credit cards, personal loans or payday loans
By consolidating your debt, you can pay less overall each month

The term ‘debt consolidation’ gets thrown around a lot.

Got lots of debts and struggling to keep track? Debt consolidation
Got a high interest rate on your loans? Debt consolidation
Want a bonus rate on a new credit card? Debt consolidation

Put simply, debt consolidation is the act of combining several loans into one new loan. It can be helpful for people who’ve got multiple debts like credit cards, personal loans or payday loans.

*If this is you, it’s time to start thinking about ya budget.*

‍So how does this ‘debt consolidation’ thing actually work?

Let’s say you’ve got 2 credit cards and a personal loan. They all have different interest rates, repayment amounts and due dates…

By consolidating these debts, you might be able to get a single loan to cover all those debts. This means you can close out your existing debts and bundle everything together with the one lender.

What happens when you consolidate your debt?

It sounds pretty simple, but there are actually quite a few variables at play…

That’s why we’ve collated some of the pros and cons to help you weigh your options.

The benefits of debt consolidation

If you can find a debt consolidation loan that has a lower interest rate than your existing debt, this can be a major benefit that means you’ll pay less overall to clear your debt

Having a single repayment can make it easier for you to create a monthly budget that slaps… and actually stick to it

Possible pitfalls of debt consolidation

The new loan might have a hefty establishment fee or other ongoing fees that outweigh other benefits
Your existing loans might have penalties for paying them off early
A debt consolidation loan might have a longer term than your existing loans, so it could take you longer to get out of debt and you’d end up paying more interest over time

Buuuuut… consolidation ain’t a magic solution

The truth is, debt consolidation should only really be used as a last resort. The better way to approach your debt would be using the snowball or avalanche method to pay down debt one by one.

Having a budget and developing healthy spending habits is essential if you’re going to make consolidating your debts work for you.

‍Why not chat to an expert?

If you’re feeling stressed about being in debt, getting some professional advice is always a good idea. Fortunately, there are lots of free debt counselling services available in Oz. The National Debt Helpline on 1800 007 007 could be a good place to start.

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