Are you struggling to manage multiple loans or juggling repayment dates across different lenders? Many people consider debt consolidation as a way to simplify their finances, combining several debts into one loan to reduce stress and potentially lower interest costs.
While Debt Busters does not offer consolidated loans, we understand why many Australians explore this path. That’s why we’re here to explain how it works and introduce other proven ways to take back control of your finances.
What Is Debt Consolidation?
Debt consolidation typically involves rolling several debts (such as credit card debts, personal loans, or payday loans) into a single new loan, ideally with a lower interest rate. This can reduce the number of repayments you need to manage and help you stay on track financially.
However, not everyone qualifies for a consolidation loan, and it doesn’t always address the root cause of financial distress. In some cases, it can even increase the total amount repaid due to longer loan terms.
What are the pros and cons of Debt Consolidation?
Consolidating your debts can be helpful for some, but it’s not the right solution for everyone. Here’s a breakdown of the main advantages and disadvantages to consider:
Pros:
- Simplified repayments: Combining multiple debts into one loan means fewer due dates and less stress managing payments.
- Potential interest savings: If you qualify for a lower interest rate than your current debts, you could pay less overall.
- Improved cash flow: A longer loan term can reduce your monthly repayment amount, giving you short-term breathing room.
- Credit score recovery: Making regular payments on a consolidated loan can improve your credit score over time.
Cons:
- Qualification barriers: You may need a good credit score and steady income to be approved for a favourable loan.
- Higher long-term cost: Spreading repayments over a longer term may mean paying more interest overall, even if the rate is lower.
- No reduction in debt: Consolidation doesn’t reduce how much you owe; it just restructures it.
- Risk of repeat debt: Without a clear plan or budget, it’s easy to accumulate new debt while still repaying the consolidated loan.
- Early repayment fees: Some lenders charge penalties if you try to pay off your loan sooner, which can reduce potential savings and flexibility.
Alternatives to Debt Consolidation
At Debt Busters, we recommend a few effective alternatives to debt consolidation, especially if you’re under financial pressure or don’t qualify for a new loan:
1. Debt Settlement
We negotiate with your creditors to reduce the total amount you owe, often settling debts for a lump sum that’s lower than the original balance.
2. Informal Payment Arrangements
We work with creditors to set up flexible, interest-free payment plans that give you breathing room, without needing a formal agreement.
3. Debt Agreements (Part IX)
A legally binding alternative to bankruptcy that allows you to make affordable repayments over time, often while reducing your total debt.
These options may be more effective than a traditional consolidation loan, especially if you’re dealing with high-interest debts or have already fallen behind on payments.
Not sure which option is right for you? You don’t need to figure it out alone. We’ll help you understand all your options, even if it’s not with us. Call us on 1300 368 322 or get in touch for a confidential chat about how we can help you find a realistic, sustainable path to becoming debt free.
Frequently Asked Questions
Will a debt consolidation loan impact my credit score?
Applying for a loan may cause a temporary dip due to a credit check. If you’re approved and make repayments on time, your score may improve. However, not everyone qualifies, and missed payments can make things worse. If you’re unsure, we can help assess your situation before you apply.
What types of debt can I consolidate?
Typically, people consolidate unsecured debts like credit cards, payday loans, and existing personal loans. Some lenders may allow you to include secured debts like car loans, but this varies. If consolidation isn’t right for you, our team can walk you through other options.
Is debt consolidation the same as refinancing?
Not quite. Debt consolidation combines multiple debts into one, while refinancing replaces an existing loan with a new one (often to get better terms).
Will debt consolidation reduce my interest rates?
It can, especially if you’re approved for a fixed-rate personal loan with a lower interest rate than your existing debts. But approval often depends on your credit history and current financial position. If your credit score is low or your financial position is unstable, you may only be offered high-interest consolidation loans, or none at all. In these cases, non-lending alternatives like debt agreements or informal arrangements may provide more meaningful relief, often freezing interest entirely.
