Understanding debt consolidation

Q&A with RACQ’s Financial Advocacy Analyst Nathanael Watts.

RACQ’s Financial Advocacy Analyst Nathanael Watts discusses the ins and outs of debt consolidation.

What is debt consolidation?

Debt consolidation is a method of simplifying your debts and can save you money. It works by combining your pre-existing loans, including car and personal loans, or credit cards, into one loan.

When should people consider debt consolidation?

You should consider what you want to achieve by combining your debts.

If you’re struggling to make repayments, the first thing to consider is talking to your lender and applying for hardship arrangements. You can also speak to a financial councillor who can assist with budgeting and any other questions.

Debt consolidation can be a good option if you’re looking to reduce your payments and make your overall debts more comfortable to manage.

Are there fees involved with debt consolidation?

There may be an establishment fee involved in taking out the new loan, so you need to ensure the benefits of the consolidated loan outweigh any fees.
For example, if you have three different loans but there is a $200 fee to consolidate them, you’ll want to save at least $200 on the new loan to make it worthwhile.

What are some of the pros of debt consolidation?

One of the biggest reasons why people consolidate their debt is to simplify and save money on their loans. Many people have loans across multiple banks which can make managing numerous repayments and schedules difficult.

What are some of the cons to debt consolidation?

Taking out a new debt consolidated loan will mean another enquiry on your credit score.

If you’re consolidating your loans, it’s important to close any other forms of debt. There is no point in consolidating the debt from your credit cards and then keeping the credit cards open.

Some debt consolidation loans may have a higher interest rate than your existing personal loan, so make sure you actually save money by consolidating.

How can debt consolidation affect my credit score?

Each time you apply for a loan, including a credit card, there will be an enquiry on your credit score. If you have had several enquiries in the past the lender will question, why you’re seeking so much credit and whether you’re able to manage your debts. This mean it’s more difficult to get loans in the future, including a home loan, as the number of enquiries, applications, and current loans will affect a bank’s assessment of your ability to repay a loan.

Are there any other options?

If you have credit card debt you have the option of balance transfers, although credit cards will typically have a higher interest rate than a debt consolidation loan.

Several credit card providers offer low or 0% interest rates on balance transfers so if you’re looking to simplify your debt you might be able to combine two or more credit cards into one using the balance transfer option.

Read the terms and conditions of the balance transfer to ensure you make the most of it and don’t get caught in more expensive debt, particularly at the end of the benefit period.

The information in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in the document is general advice and does not take into account any person’s particular investment objectives, financial situation or needs. Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives, financial situations and needs.