Since 2010, the total consumer debt in Australia has risen by 46.7%. In 2010, total consumer debt stood at $1.5 trillion, encompassing mortgages, personal loans, and credit card balances. As of 2024, the total debt skyrocketed to $2.2 trillion. This increase is driven by factors such as rising property prices, higher living costs, and increased borrowing for both personal and investment purposes.
While this impact is felt on the economy, its impact is most damaging on the individual level. Those paying off multiple debts at once can experience:
- Financial stress
- Reduced savings
- Limited financial flexibility
- Higher interest costs
- Reduced credit score
As a result, there’s no surprise that 1 in 5 Australians have used or are using debt consolidation. If you’re paying off several debts at once, it may be within your interests to consider a debt consolidation plan.
In this blog, we’ll break down the key elements of debt consolidation, diving into how it works and the common tips and pitfalls that you should be aware of before signing up.
How does debt consolidation work?
Debt consolidation combines all your debt into one lump sum. This lets you pay off your entire debt with regular monthly payments (and potentially at a lower interest rate).
Debt consolidation works in three stages. First you take out a consolidation loan – better known as a personal loan –, next you use that loan to pay off your debts, then you pay off the consolidation loan.
The reason why debt consolidation can help is quite simple. Let’s say you have a credit card of $25,000, split between three cards – if you take out a loan for $25,000 you can pay out those credit cards with one manageable payment and:
- Improve your cash flow
- Find more financial flexibility
- Potentially reduce your interest
Should you use debt consolidation?
Debt consolidation is a great option for those balancing multiple repayments each month. It can improve your cash flow and combine your debt into one manageable payment. There are even solutions for those with impaired credit.
If you’re finding it challenging to stay on top of multiple lines of credit, including Buy Now Pay Later debt, credit cards and so on – a debt consolidation loan could be the solution.
Tip: Search for a suitable loan product
Don’t just accept the first loan product you find. Finding a suitable solution for your consolidation is the key to paying off your debt and getting your finances under control. Consider what’s important to you when searching for plans, is it lower monthly repayments, no exit fees, or rate?
Pitfall: Applying for more than one loan
While it’s crucial to look around for more than one loan, you shouldn’t apply for more than one loan. Applying for several loans can have an impact on your credit score.
If you use a broker for assistance, then you could avoid this problem. Brokers are able to check your financial situation against several lenders before a formal application, ensuring you can shop around without damaging your credit score.
Tip: Consider your loan term
If you want to improve your cash flow then a longer loan term may be for you, as it can lower your monthly repayments. However, choosing the longest loan term would also increase the amount of interest payable over the course of your loan term.
Before settling on a loan, ensure that your loan term matches with your goals.
Pitfall: Accumulating more debt if you can’t pay it back
The relief of combining your debts into one payment can make you more relaxed financially. While this helps some people get a good night’s sleep, it can also make some people more likely to increase their debts with more credit card spending.
Avoid increasing your credit card debt after you consolidate, otherwise you could just end up in the same situation you just escaped from.
Pitfall: Not checking the fees
While you’re shopping around for a suitable loan, you should also pay close attention to loan fees. Some loans come with additional fees, such as monthly account fees, early payment fees, and annual charges.
Make sure you should keep a close eye on the small print and ensure the terms match up with your financial strategy before you sign off on your debt consolidation plan.
Tip: Come up with a plan
You will need to do some budgeting and planning before you take out your consolidation loan. If you want to pay off your debt quickly, you’ll have to make some cuts to your spending and plan ahead.
Tip: Get to the source of your debt
While debt consolidation is a good way to get on top of your monthly repayments, it’s far from a magic finance fix. After you consolidate your debt, it’s good practice to reflect and get to the bottom of what led you to your financial situation in the first place.
The TL;DR
A debt consolidation plan is a great way to regain control of your finances, however there are several things to consider both before and during the course of your plan.
Always read the small print on your debt consolidation plan, ensure that you select the right consolidation loan for your needs, and you’ve altered your spending habits to get debt free at the conclusion of your plan.
Reach out to our team below for more information regarding a debt consolidation plan.
