Debt consolidation and refinancing

Will you be better off consolidating your debts?

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 loan.

Here we explain the things to check before you consolidate or refinance your debts and how you can get free help.

What is debt consolidation?

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 debts.

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 loan.

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're having problems paying your mortgage.

Work out whether you will save money by switching to another mortgage.

Mortgage switching calculator

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.
  • 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're having problems paying 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 loan.

Case study: David didn't check the fine print

Man moving out after refinancing his loans

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 debts

There is free help available to help you get back on track with your finances.

  • Financial 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 an ombudsman.
  • Free legal advice - Free legal advice on your debts is also available from community legal centres and Legal Aid offices in each state and territory.

Compare different loans and loan terms.

Personal loan calculator

Debt consolidation checklist

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 assets.
  • 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 Connect's Professional Registers to check your lender is licensed.

Make sure you explore other options before paying someone to consolidate or refinance your loans.

Related links

Last updated: 25 Oct 2018