Way Forward offers repayment consolidation as part of our service to make managing your debts easier. This means we negotiate repayment plans with your creditors and take one reoccurring payment from you that is then distributed to your creditors. We are not a debt consolidation service so you still hold those debts.
Importantly, Way Forward helps with payment consolidation but not debt consolidation. We negotiate repayment plans on your behalf with your creditors. We then group all of these into one payment that we take from you and then distribute to your creditors – so you still hold your debts. While we don’t offer debt consolidation, we want to offer helpful information so you understand your options.
What is debt consolidation?
Consolidating debt typically means rolling all your debts – personal loans, student debt, credit card, store cards and other forms of borrowing – into one debt. People sometimes consolidate their debts from multiple to one debt to simplify their repayments with one simple payment and/or to swap multiple higher cost credit facilities to one cheaper debt.
Everyone’s circumstances are different so it’s important to not just understand the benefits but also the risks. The Federal Government’s MoneySmart website has basic information and we advise contacting your local community legal centre or a financial counsellor before taking these steps.
If you are offered a consolidated debt, ensure that this is a consumer debt rather than business debt.
If you do make the decision to consolidate your debts, ensure you do so through a reputable financial institution. This means that the business is licensed, which you can search on ASIC Connect’s Professional Registers on one of the following three lists:
- Credit Registered Person
- Credit Representative
- Credit Licensee
What is a debt consolidation loan?
A debt consolidation loan combines all your debts into one personal loan with one lender. For example, if you have one credit card with an outstanding balance of $5,000 and another with $3,000, a store card with $2,000, you could replace these three debts by consolidating them all into one loan for $10,000. This means one loan, one payment and a repayment term that will eventually see the debt cleared.
Lenders may offer you this option so all your debts will be transferred to them and they will receive the interest from those repayments. Even though your debts may be consolidated into one loan, you still need to repay the full principal amount owing on all the loans. However, these are now taken out as one payment.
So what does a debt consolidation loan look like?
Well, different organisations call it by different names but they usually fit within one of the following four definitions.
Personal loan unsecured
This is where you borrow a fixed amount of money for a fixed period and the repayments are generally specified for the duration of the loan. Once all of the repayments have been made, the debt is paid off. Some personal loans allow you to pay the loan off early, but you need to check if the lender will charge a fee for early repayment.
Personal loan secured
The only difference between a personal loan unsecured and a personal loan secured is that for a secured personal loan, you are putting up an asset to provide the lender. This means the asset you’ve provided is something they can sell to recover the debt if something goes wrong. Typical forms of security include cars and homes.
Refinance onto your mortgage
If you have a mortgage you may have the option to refinance and increase your mortgage to pay off your debts. Mortgages tend to have lower interest rates and can seem attractive, but beware, most mortgages are paid off over a lengthy period of time.
If you increase your mortgage to repay your debts, you are likely to get a lower interest rate. However, you could end up paying more over the life of your mortgage and end up taking up to 30 years to repay that debt.
Credit card balance transfer
Credit card companies thrive on new customers. One of the ways to attract new customers is offering to bring over all your existing debts onto a new credit card. To help convince you to join, they will often provide an extended period without any interest.
Although it might sound attractive, you need to remember a couple of things with a balance transfer. Whilst you will most likely have a period of not being charged any interest, if you have not cleared the balance by the end of the interest free period, you will now have their current interest rate, which can be quite high.
Another pitfall of balance transfers is it’s a revolving limit, which means the limit can go up as much as it can go down. If you’re not careful you can easily find yourself with the same amount of debt if you keep using the limit.
Lastly, once you’ve paid off your card you now have a card with a limit equal to, or more, than your original debt consolidation amount. This can be very tempting to use and if you’re not careful, can place you straight back into the situation you’ve worked so hard to get out of.
Is it a good idea to consolidate your debt?
With one debt and a single payment instead of multiple, what’s not to like? Before jumping straight in, you need to ask a few questions.
Will I actually be paying less money?
The first question is, how much interest will you end up paying with one new loan versus the current multiple ones you hold?
Remember that a lower interest rate doesn’t necessarily mean you will pay less interest. If you end up paying the debt off over a longer period of time, you may ultimately end up paying a higher amount of interest.
Secondly, what other charges should you consider? Well, make sure you understand how much it will cost to set up the new loan and whether any penalties or charges exist if you choose to pay off the loan early.
Am I swapping my unsecured debts for secured ones?
By providing an asset (such as a car or house) as security for the debt consolidation loan, you are likely to get a cheaper interest rate. However, it does mean if you stop paying the loan, the asset you have provided as security could be used to pay back the debt.
So is it a good idea to consolidate your debt?
It completely depends on your circumstances. Always remember that the benefits can sound good but you need to understand the risks including the new arrangement terms, credit reporting and credit scoring. We recommend you seek advice about the best option for you before signing up. This might be guidance from a financial counsellor or your local community legal centre.
Pros and cons for consolidating your debt
|Pay once instead of multiple times each month. Using a single personal loan to pay off your debts and interest to make one repayment over a fixed time period can make managing your debts easier.||You will possibly increase your overall debt. Consolidating debt provides more opportunity to access credit or the temptation to reuse credit cards that have now been cleared through a consolidation loan. This can mean more spending and as a result accumulating even more debt than you started with.|
|Having a fixed interest rate and terms can mean your repayments are consistent and predictable, which helps with planning and budgeting. However, ensure you commit to a repayment amount that is realistic to pay off.||Debt consolidation can cost you more overall. Although a personal loan with a longer term can help you reduce your monthly repayments, a longer loan term means you’ll pay more interest and spend more in the end.|
|Reduce your monthly repayments. By extending the length of the term on your personal loan means your monthly repayments are smaller. But remember the catch: the longer it takes, the more you will end up paying in interest.||Negatively impacting your credit score. If you don’t keep up with the monthly repayments on your personal loan, you could damage your credit score or end up in financial hardship.|
Do consolidation loans hurt your credit score?
Credit scores are based on credit behaviour over a longer period so consolidating loans are unlikely to improve your credit score in the short term. However, if setting up one simple payment helps you make all your payments on time, it will help your credit score over time.
What are the risks of debt consolidation?
The National Debt Helpline provides useful information about the risks of debt consolidation. Generally, consolidating debts means they may take longer to repay and may cost more to pay back over the lifetime of the loans.
There can be hidden fees, charges and interest rates so you need to be careful. If you are consolidating your debts, this can mean only one lender is holding the loan. If this is the case, the sole creditor can determine the conditions of any further loans or changes to those loans should you need to renegotiate.
Which banks offer a debt consolidation loan?
Most of the major banks and small to medium lenders offer debt consolidation loans.
How Way Forward can help with debt consolidation
Importantly, Way Forward helps with payment consolidation but not debt consolidation. We negotiate repayment plans on your behalf with your creditors. We then group all of these into one payment that we take from you and then distribute to your creditors.