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Debt consolidation and refinancing

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If you have several debts, it may sound like a good idea to roll them into one consolidated loan. But that can cost you more and risk you losing any asset the debt is secured against. 

Debt consolidation (or refinancing) can make it easier to manage your repayments. But it may cost you more if the interest rate or fees (or both) are higher than before. It could also cost you more if the amount of time you take to pay off the loan is longer.  

You could also get deeper into debt if you get more credit, as it may tempt you to spend more! 

For example, a $20,000 debt, refinanced to a lower interest rate – but over a longer term – will reduce your weekly repayments, but could increase the total cost.

Debt Interest rate Paid off over Total cost of loan
$20,000 10% 5 years $25,496
$20,000 8% 10 years $29,119
$20,000 6% 15 years $30,379

You can use our personal loan calculator to work out the real cost of your loans.  

Here are some things to consider before deciding to consolidate or refinance.

What debt consolidation and refinancing mean

Debt consolidation means you roll several debts into one new loan. You then make one regular repayment to one lender.

You might consolidate: 

Refinancing means you replace or extend an existing loan with a new one. This can be with the same lender or a different lender.  

Refinancing can be used with debt consolidation; for example, you might consolidate all your loans into one new loan, by refinancing. 

Debt consolidation/refinancing may help when: 

chevron_right You pay less overall. The interest rate and fees on the new loan are lower than on your current debts.

chevron_right You have a clear end date. The new loan term is not longer than your current debts. 

chevron_right You can afford the repayments. The new repayment fits your budget and you can keep paying it. 

chevron_right You stop using old credit. You close or reduce old credit cards or other loans, and do not take on new debt. 

If some of these things are not true, consolidation can make your situation worse, not better.  

Protect your home or other assets 

To get a lower interest rate, you might be considering turning your unsecured debts (such as credit cards or personal loans) into a single secured debt. For a secured debt, you put up an asset (such as your home or car) as security. 

This means that if you can't pay off the new loan, the home or car that you put up as security may be at risk. The lender can sell it to get back the money you borrowed. 

Consider all your other options before using your home or other assets as security.

Avoid companies that make unrealistic promises

Some companies advertise that they can get you out of debt no matter how much you owe. This may be unrealistic.

Don’t trust a company that:

Use ASIC’s Professional Registers Search to check the company is licensed. Only deal with a licensed credit repair or debt management company. Learn more about pros and cons of debt management firms. 

How to check that debt consolidation will work for you

 

1. List all your current debts 

For each debt, write down: 

  • the balance 
  • the current interest rate 
  • the fees you pay, including any penalties for paying off your loan early 
  • the remaining term 
  • your current monthly repayment 

2. Compare with the new loan 

Ask the new lender for: 

  • the interest rate 
  • all fees and charges, including application fees, legal fees, valuation fees, and stamp duty. Some lenders charge these fees if the new loan is secured. 
  • the loan term 
  • the repayment amount and frequency 
  • whether the interest rate is fixed or variable 
  • whether you can make extra repayments without penalty  

3. Stress-test your budget 

Check you can afford the new repayment if: 

  • interest rates rise 
  • your income drops 
  • your living costs go up 

4. Be honest with yourself. 

Ask yourself (and answer honestly): 

  • Will I cancel my old credit cards/other debt? 
  • Will I avoid applying for other credit? 
  • Do I have the discipline to stick to this regular repayment? 

Be cautious of switching to a loan with a longer term. The interest rate may be lower, but you could pay more in interest and fees in the long run. 

Visit our cost of living hub for practical help with Moneysmart’s tools, calculators and tips. There are suggestions and links to help you cut expenses, manage your budget and find support.

Consider your other options first

Before you pay a company to help you consolidate or refinance your debts:

Talk to your mortgage provider

If you're struggling to pay your mortgage, talk to your mortgage provider (lender) as soon as possible.

All lenders have programs to help you in tough times. Ask to speak to their hardship team about a hardship variation. They may be able to change your loan term, or reduce or pause your repayments for a while.

Consider switching home loans

A different home loan could save you money in interest and fees. But make sure it really is a better deal. See switching home loans.

Talk to your lenders

If you have credit card debt or other loans, ask your lender if they can change your repayments or extend your loan. The National Debt Helpline website has information about how to negotiate payment terms.

Consider a credit card balance transfer

A balance transfer may be a good way to get on top of your debts. But it can also create more problems. See credit card balance transfers to help you choose wisely.

Get free professional advice

If you're spending more than you earn, there's free help available to help you get back on track.

Talk to a free financial counsellor. They can explain your options and help you make a plan to get your finances back on track. This is a free and confidential service. You can contact the National Debt Helpline on 1800 007 007. The helpline is open Monday to Friday, 9:30am to 4:30pm. Or live chat, Monday to Friday, 9:00am to 8:00pm.

Access free debt management support. You may be able to access free support to help you manage your debts. Way Forward is a not-for-profit organisation that helps people experiencing long-term financial hardship by putting in place affordable debt management plans. You can contact Way Forward on 1300 045 502 Monday to Friday, 9:00am to 7:00pm.

If you're facing legal action. Free legal advice is available at community legal centres and Legal Aid offices across Australia. If you're facing legal action, contact them straight away.

For an extra step-by-step guide on what to do, see the National Debt Helpline's get your bills under control.