Debt consolidation

The honest version

Consolidation moves debt from high-rate, short-term products into a low-rate, long-term one. The monthly payment falls, sometimes dramatically.

Here is the part that gets skated over: a lower payment is not the same as less debt.

A $20,000 personal loan at a high rate over three years has a painful monthly payment and is gone in three years. The same $20,000 rolled into a 30-year home loan has a much smaller monthly payment — and if you only ever pay the new minimum, it stays with you for 30 years and can cost substantially more in total interest, even at a much lower rate.

That is the trade. It is a genuine trade, and it is sometimes worth making. But it should be made with the number in front of you.

When consolidation genuinely helps

You are in real cash flow difficulty. If the current repayments are unsustainable and the alternative is missed payments, defaults or worse, reducing the monthly obligation has value beyond the arithmetic. Preventing a default is worth real money.

The rate difference is very large. Credit card and store card debt at high rates is expensive in a way that personal loans are not. Moving genuinely high-rate revolving debt is a bigger win than moving a car loan.

You will keep paying the old amount. This is the case where consolidation is unambiguously good. Consolidate, then keep making the same total repayment you were making before. The extra now goes against a low-rate debt and clears it far faster. You get the safety of the lower minimum and the speed of the higher payment.

It is genuinely one-off. Consolidation works when it draws a line. It fails when it becomes a cycle.

You need to clear debt to qualify for something else. Sometimes consolidating is what makes a refinance or purchase possible at all, because scattered consumer debt is destroying serviceability.

When it does not

You will drop to the minimum payment. Then you have converted a short expensive debt into a long cheaper one and probably increased what you pay overall.

The cards go back up. This is the single most common failure. The cards are cleared, the limits remain available, and within two years there is consumer debt again plus a larger mortgage. If the underlying spending has not changed, consolidation makes the position worse, not better.

It pushes you over 80% LVR. Adding consumer debt to the mortgage increases the loan against an unchanged property value. Crossing 80% can trigger lenders mortgage insurance, which is a substantial cost that frequently wipes out the benefit entirely.

The debt is nearly gone. Rolling the last twelve months of a car loan into a 30-year mortgage is almost never worth the transaction costs.

Whether this helps you depends on the numbers. It is worth half an hour with someone who will tell you if the answer is no. Book a free chat — no cost, no obligation.

What lenders look at

Consolidation applications get more scrutiny, not less, because lenders know the failure modes.

• Why the debt accumulated. A one-off event — medical costs, a car replacement, a period between jobs — reads very differently from a pattern of ongoing overspending
• Repayment conduct on the existing debts. Consistent payments read well even where the balance is high. Arrears do not
• Loan-to-value ratio after consolidation. Most lenders are considerably more conservative on cash-out for debt consolidation than on ordinary lending
• Serviceability on the new consolidated loan at the assessment rate
• Whether the accounts will be closed. Most lenders pay the debts directly at settlement and require evidence that credit facilities have been closed, not merely zeroed

The structural option worth knowing

You do not have to spread consolidated debt over 30 years.

The loan can be split: the original home loan continues over its remaining term, and the consolidated portion sits in a separate split over a much shorter term — say five years.

You still get the lower interest rate. You do not get the 30-year drag. The repayment is higher than a fully-blended consolidation but far lower than the original consumer debt payments, and the debt actually clears.

This is very often the better structure, and it is frequently not offered. Ask for it.

If you are genuinely struggling

Sometimes the right answer is not a loan at all.

If you are behind on payments, receiving collection calls, or using credit to cover essentials, please speak to a free financial counsellor before taking on more lending. They are independent, they do not sell anything, and they can negotiate directly with creditors in ways that are not available to you or to us.

National Debt Helpline — 1800 007 007 — free, confidential, independent.

Lenders also have hardship provisions they are legally obliged to consider. A hardship arrangement with your existing lender is sometimes a much better outcome than a refinance, and it costs nothing to ask.

We would rather point you somewhere more useful than write a loan that does not fix the problem.