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 will 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 Governments 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 that 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. Lenders may offer you this option because this means all of your debts will then be transferred to them and they will receive the interest from those repayments.
Even though your debts may be consolidated in one loan, you still need to repay the full principal amount owing on all of the loans but these are now taken out as one payment
Is it a good idea to consolidate your debt?
It 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 that you seek advice about the best option for you. This might be from a financial counsellor or your local Community Legal Centre.