How to consolidate debt

Struggling to manage your debt is an enormous strain. The lack of control, worry and fear can seep into every part of your life. For some it’s a temporary blip, like an unexpected change in circumstances, while for others it has become overwhelming over many years.

Through careful debt consolidation, you can take back control of your finances – and your life.

What is debt consolidation?

Many Australians experience debt stress, so the first thing to remember is that you’re not alone. It’s in your lender’s best interests to help you manage it.

When you consolidate debt, you fold several outstanding debts into one loan. Everyone’s circumstances are different, but you might have a couple of credit card balances, a car loan and a personal loan. Some of these attract really high interest, so you might feel like it’s impossible to get on top.

With a consolidated debt loan, you just have one repayment to make each month. With a lower interest rate, making the same repayments will actually clear your debt faster, and you’ll be able to keep track of what’s owing.

Understand your debt position first.

While it’s understandable to want to avoid looking closely at your debt, understanding it is the best first step you can take.

Look at things like:

  • How much do you really owe across all of your debts?
  • How much interest are you paying each month in total?
  • Are you paying too much in fees?
  • What are the exit conditions of each debt?
  • Is there anything you can pay off right away?

Getting a copy of your credit report can help you see how your outstanding debt has affected your overall position, and put you in great stead to better manage it ongoing.

What are the options to help pay off debt?

There are several strategies for debt consolidation. It’s important to weigh up each to choose the right one for your situation.

1. A personal loan – handy for budgeting.

A personal loan can be a useful tool to consolidate debt. If you shop around, you may find you can get a low-rate loan with zero accounting keeping fees, which will help your available budget stretch further. Choosing the shortest loan term you can afford will also mean you pay less interest over time, but look for a balance between affordability and your own stress levels. Watch out for lenders that charge early payment fees – you shouldn’t be penalised for clearing the debt sooner.

2. Your home loan – the lowest rate of all debt

If you have a mortgage already, it might be possible to use your home loan for debt consolidation.

The main benefit is that a home loan comes with the lowest rate of all types of credit. Consolidating debt may be as simple as topping up the balance of your loan to pay out other debts, or refinancing to a new, bigger loan if you believe this lets you access a better loan rate or improved features.

This does mean your overall loan will take longer to pay down, but repayments on your debt consolidation will be much lower. If you can afford to, pay some of the extra you’re saving to bring the whole balance down sooner.

3. Financial hardship options.

COVID and life can throw unexpected surprises at us. If you have lost your job, suffered an illness or injury, or been affected by a natural disaster, lenders generally want to help you manage your financial position and have in place hardship assistance policies.

Juggling personal debt can make us feel powerless, embarrassed and anxious, but there are options available.