Debt consolidation and refinancing
Will you be better off consolidating your
If you are struggling to manage your debts, it may sound like a
good idea to pay someone to roll them all into one consolidated
Here we explain the things to check before you consolidate or
refinance your debts and how you can get free help.
What is debt
Debt consolidation involves rolling all your existing debts into
one loan. This may help you to better manage your repayments, but
it may also make your situation worse if the interest rate or fees
in the new loan are higher than they were with your original
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.
Things to consider before
you refinance your debts
Taking out a debt consolidation loan can be helpful if it means
you will pay less in fees and interest. But, it may only be a
short-term fix if you can't meet the repayments on your new
Before you refinance or pay a company to help you with your
debts, there are some things you should do.
- Talk to your credit provider - Ask your lender
if they can change your repayments or extend your loan. See trouble with
debt for information on how to do this.
- Consider switching home loans - A different
home loan could save you money in interest and fees but you need to
make sure it really is a better deal. See switching
home loans for more information.
- Get a credit card balance transfer - If you
research your options, a balance transfer deal can be a good way to
get on top of your debts - but it can create more financial stress.
See credit card balance
transfers for more information.
- Consider selling your home - You may be better
off selling your home if you are struggling with mortgage
repayments, as it is better to sell on your own terms than for the
lender to sell it as a mortgagee sale. Find out what to do if you
are behind on your mortgage.
Work out whether you will save money by switching to another
What can go wrong with debt consolidation?
Refinancing can be risky if you are not
careful. Here are some things that can go wrong.
- Getting deeper into debt - If you get access
to more credit through your consolidated loan you might be tempted
to spend more.
- Losing your home - If you turn all your unsecured debts (like credit cards) into
a secured debt (like your home loan) you
could lose your home if you don't pay the new debts.
- High fees and repayments - Some lenders or
brokers charge high fees or arrange unaffordable repayments on the
new loan. This is called 'equity stripping'.
- You may still lose your home - Debt solution
companies can make big promises but they may not be able to stop
the repossession of your home. Find out what debt solution
companies can and can't do for you and practical steps to take if
you are behind on your mortgage.
Do not trust a broker who:
- asks you to sign blank documents
- refuses to discuss repayments
- rushes the transaction
- won't put all loan costs and the interest rate in writing
before you sign up, or
- arranges a business loan when you only need a basic consumer
Case study: David didn't check the fine print
Four years after buying his new apartment, David was made
redundant and began to fall behind in his mortgage repayments. He
was worried his lender would sell the apartment to repay the loan,
so he approached a broker who helped him refinance his loan.
The broker arranged a loan that had high fees and costs to
refinance. David also discovered that he was paying a higher
interest rate on the new loan and the repayments were $500 more per
month than on his previous loan. Within 12 months, David had to
sell his apartment. If he had sold earlier, he would have saved a
lot of money.
How to get free help managing your
There is free help available to help you get back on track with
counselling - A financial counsellor can help you sort
out your money and negotiate debts with your creditors.
- Complain to an
ombudsman - If you have tried to negotiate with your
credit provider and you think they are being unfair, you can make a
complaint to a free external dispute resolution scheme or
ombudsman. While the ombudsman is processing your complaint, the
lender cannot start or continue legal action. But, if court
judgment has already been handed down, it is too late to approach
- Free legal advice -
Free legal advice on your debts is also available from community
legal centres and Legal Aid offices in each state and
Compare different loans and loan terms.
Personal loan calculator
Here are some things you should do before you sign any debt
consolidation loan contracts.
- Compare the interest rate, fees and charges -
Make sure you will be paying less for your new loan by comparing
the interest rate, including fees and other costs, against your
original loan. Some lenders charge penalties if you pay off loans
early and some charge application and legal fees, valuation and
stamp duty if the new loan is secured against a home or other
- Check the terms - 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.
- Check the company is licensed - Lenders and
brokers that are not licensed are operating illegally. Search ASIC
Professional Registers to check your lender is licensed.
Make sure you explore other options before
paying someone to consolidate or refinance your loans.
Last updated: 23 May 2018