Credit protection

Do the Numbers Before Jumping on Debt Consolidation Loans

Talie Croad had racked up $13,000 in consumer debt when she decided something had to be done about it.

There was money owed on a Q card, credit cards, a personal loan, and smaller amounts owed to people she knew. She thought putting it in one loan would make it easier to manage.

It consolidated all the debts into one, with Westpac, at an interest rate of just over 16%. “It had definitely gotten a little out of control,” she said.

Debt consolidation loans are often marketed as something akin to a magic bullet for people with too many hire-purchase agreements and too much credit card debt hanging over their heads.

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But advisers warn that they can sometimes create more problems than they solve.

How do you know if a debt consolidation loan is right for you?


Before you do anything, think about how you got into the position where your debt became uncomfortable.

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If you plan to consolidate your debts, you need to cut out responsible credit cards.

Councilor Shula Newland said people who needed a debt consolidation loan usually spent more than they earned.

Before taking a short-term solution like a debt consolidation loan, she urged her clients to consider whether they could fully commit to changing their spending habits in the future.


David Boyle, head of the investor education group at the Commission for Financial Capability, said it was important to be clear about how much debt people had and how much it was costing them.

“Sometimes you take out a hire purchase here and a loan there and that can be a lot. Usually people know the amounts they’re paying because they’re coming out of their bank accounts, but they’re not always aware of the total, so it is good to list what you have and the rates you pay.”

When you have this information, you can compare it to what is offered for debt consolidation.

There’s no point in transferring the amount you owe to a new loan unless it’s at a cheaper rate. But if you have 20% credit card debt and can refinance it for a significantly lower price, it could be a worthwhile decision.

“Debt consolidation is a good option if they are able to get a better rate than they are currently paying because even if they pay the same amount in payments, the time it takes to pay off the loan would be shorter,” Boyle said.


The amount you will pay for your debt consolidation loan depends a lot on your personal situation.

If you have a mortgage, you should be able to get the loan at your normal interest rate, which may be less than 4% right now.

But if you don’t, you’ll likely be paying 15.99% or more per year, depending on the lender and whether you have collateral to offer.

Finance companies that specialize in debt consolidation loans will often be more expensive than banks.


Even if the interest rate is lower, if it takes you a lot longer to pay it off, you won’t save any money.

“It may be better, but there’s a risk you’ll pay more,” Boyle said.

This is especially true if you add debt to your mortgage. Even at a 4% interest rate, if you take 30 years to pay off your debt, you’ll end up paying significant interest.

Set up the loan to be repaid on a tight schedule so your interest charges don’t skyrocket. If you can, choose a shorter term than your existing loans.

Newland said some people would feel less motivated by a debt consolidation loan.

If set up to be repaid over several years, there is little reward until the loan is repaid at the end of the term. But if you have a series of small loans, you have the option of congratulating yourself each time a loan is paid off, which could help you stay on track.

Think about what will help you stick to your goals.


Don’t think that because you’ve consolidated your debts into one loan, you’re free to accumulate more.

Boyle said it’s common for people to feel relieved they’ve settled their loans and start shopping again.

Newland said she often sees people six months after taking out a debt consolidation loan, in even worse shape.

“They get a loan and think ‘cool, I only have one debt now’ and then they go and borrow again on the credit card and end up worse off because they increased their borrowing.”

Those who had already borrowed up to the limit might find such a move would tip them into bankruptcy, she said.

Newland said he’s seen people rack up debt and put it on their mortgage year after year.

“They never got into good financial habits, they go into consumer debt and every few years they pile it up on the house. Then they get into retirement and they haven’t paid it back. mortgage or, even worse, they end up losing their homes.”

She said it was something to be approached with caution.

“A lot of people do it, there are all these adverts on TV and they think it’s the magic wand that will fix what’s wrong but sometimes it can make things worse.”

Croad said she can understand how tempting it can be to add a loan again once it starts to become more manageable.

She said that in the future she would recommend people do whatever they can to avoid debt in the first place.

“I wouldn’t recommend going into debt unless it’s really important.”