Debt consolidation and refinancing
Will you be better off?
If you are struggling to manage your debts, it may sound like a
good idea to pay someone to fix your credit problems and roll all
your loans into one loan. Here we explain what to consider before
you refinance your loans and how you can get help for free.
Consider other options
before you refinance
Consolidating or refinancing loans can work for some people if
it means they will pay less in fees and interest. For others, it
may only be a short-term fix, especially if they can't meet the
repayments on the new loan.
Before you refinance or spend money paying a company to help you
with your debts, there are things you can do.
Talk to your credit provider
If you are struggling with your repayments, try to come to a new
arrangement with your credit provider. See trouble with
debt for information on how to do this.
Switch home loans
Changing home loans could save you money, but you need to be
careful. Some mortgage brokers or lenders make a
commission if they persuade you to switch
loans. They may make misleading claims about how much you might
save, just to sell you the new loan. See switching
home loans for more information.
Sell your home
You may be better off selling your home if you are struggling
with mortgage repayments. It is better to sell your home on your
own terms than for the credit provider to sell it as a mortgagee
sale. You may even
end up with money left over to repay other debts.
Get free financial counselling
When you are having money problems it may be better to seek help
from a financial counsellor to help you sort out your money and
help negotiate your debts with your creditors. Find out how a
financial counsellor can help you.
Help from the Ombudsman
If you have tried to negotiate with your credit provider and you
think they are being unfair, you can contact a free external
dispute resolution scheme. Your lender must tell you which one of
these two schemes it belongs to:
Check the debt consolidation
loan is right for you
Compare the interest rate, fees and charges
Before you take out a new loan to consolidate your debts, make
sure your new interest rate, including fees and costs, is much
lower than what you're paying on all the debts you are
consolidating. If you end up paying higher interest, you're losing
money and making your problem worse.
Do not trust anyone who asks you to sign blank documents,
refuses to discuss repayments, rushes the transaction or won't put
all loan costs and the interest rate in writing before you sign
Many lenders charge penalties or costs if you pay off loans
early. Because a consolidation loan involves taking out one new
loan to pay off your current loans, your new consolidation loan may
be secured against your home or other assets, so you may have to
pay application fees, legal fees, valuation and stamp duty.
Check the loan term
Beware of longer loan terms. Even if the interest rate is lower
on the new loan, paying off a short-term debt (like a credit card
or personal loan) over a very long term means you will still pay
more in interest and fees in the long run.
Compare different loans and loan terms.
Personal loan calculator
Check they are licensed
If you plan to use a debt consolidation company or credit
provider, make sure they are licensed by ASIC. Credit providers and
brokers that are not licensed (or are not an authorised
representative of someone who is licensed) are operating illegally
Search ASIC Connect's Professional Registers to check your credit provider has been
licensed or you can phone ASIC's Infoline on 1300 300
Avoid refinancing traps
Refinancing can be risky if you are not
careful. The Financial Rights Legal Centre explains the pitfalls of
debt management firms in their video on 'Debt Dating'. View it at
their website yourfinancialrights.org
Here are some things you should avoid when it comes to
Getting deeper into debt
Avoid refinancers who make unrealistic promises about getting
you out of debt or who advertise that they can help you, no matter
how much you owe.
Debt consolidation can get you even deeper
into debt by letting you borrow more money. For example, if you
transfer your credit card balances onto your home loan, you might
be tempted to put new debt onto your credit cards.
If the consolidation loan simply increases your overall level of
debt, you are making your financial problems worse.
Losing your home
If you turn all your unsecured debts
(such as credit card debts) into a secured debt (using
an asset such as your home as security), remember that if you don't
pay the new loan then you could lose your home
Dodgy lenders and brokers
There are brokers and lenders that take advantage of people who
are desperate to save their home. They do this by:
- Charging them high fees, sometimes more than 20% of the equity
in their home
- Arranging a refinancing agreement where it is extremely
unlikely that the borrower will be able to afford the new
This is called 'equity stripping' and has landed a lot of people
in financial trouble.
A 2008 ASIC survey found that borrowers trusted brokers who told
them they could arrange a loan that would save their home, and did
not ask about the total costs of the refinance. Some brokers did
not disclose their fees or total costs in time for borrowers to
make an informed decision.
Equity stripping can be very lucrative for brokers and lenders,
as they can make big profits at minimal risk. Some lenders have
been known to charge borrowers 50% interest or more, and higher
rates if they default on the loan.
Read our case study on equity
stripping to find out how a young couple lost their home
through a dodgy broker.
Here are some warning signs that your broker may be dodgy:
- They ask you to sign blank documents or credit application
forms with false information in them
- They arrange a business loan for you when you only want a basic
- They do not discuss your financial situation in detail before
arranging a loan
- They do not explain fees, charges and repayments before you
- They tell you not to worry about reading the paperwork
- They advertise that they can help you no matter how desperate
your financial situation
Case study: David didn't check the fine print
David was delighted with his new
apartment but 4 years after buying it, he was made redundant. He
began to fall behind in his repayments and worried that his credit
provider would sell the apartment to repay the loan.
David approached a broker who advertised that he could help
people in arrears on their loans. By the time the broker had
refinanced his loan, David was 3 months and more than $5,000
overdue on repayments.
The broker and the new credit provider charged David over
$30,000 in fees and costs to refinance. He soon discovered that he
was paying a higher interest rate on the new loan (9.95% instead of
7%) and that the repayments were $500 more a month than on his
previous loan. Within 12 months of refinancing, David had to sell
his apartment. If he had sold earlier, he would have had more
Work out whether you will save money by switching to another
Stopping repossession of your property
Think very carefully before you sign up with a debt solution
company that offers to help stop the repossession of your property.
These companies sometimes use tactics to scare you into using their
services, like telling you that if you don't contact them straight
away you might lose your house.
Debt solution companies may promise the world but some charge
fees for services you could get for free. The truth is that they
may not be able to stop the repossession of your home. Find out
solution companies can and can't do for you.
If your lender has threatened legal action because you are
behind on your mortgage repayments, the best thing for you to do is
contact an external dispute resolution (EDR) scheme immediately.
The benefits of using EDR are:
- It's a free service - You will not be charged
for using an EDR scheme
- It delays repossession - The lender cannot
start or continue legal action while your matter is being
considered by an EDR scheme
Here are contact details for the two EDR schemes:
If your lender has started legal action against you, EDR can
only be used before the Court makes a ruling. If judgment has
already been handed down, it is too late to use EDR. In this
case, you should urgently get free legal advice.
Our behind on your mortgage webpage
explains the steps a lender could take when they are trying to
repossess your home.
Get free debt help
Financial counselling is a free
service that you can use to help sort out your debts.
Financial counsellors are independent and confidential.
advice on your debts is also available from community legal
centres and Legal Aid offices in each state and territory.
If you're having trouble paying your debts now,
you stand little chance of paying back a new loan which might have
a higher interest rate and added fees. Explore other options
before consolidating or refinancing your loans.
Last updated: 19 Mar 2018