If you’re struggling with multiple debts and feeling weighed down by high interest rates, debt consolidation might be the solution you’ve been searching for. It merges your debts into one, so it’s easier for you to manage payments and track your progress.

However, debt consolidation has risks. Through years of helping clients, we’ve seen firsthand how a lack of awareness about potential drawbacks can lead to a more challenging financial situation. To help you avoid these pitfalls, we’ve compiled our top 7 tips to ensure debt consolidation works for you, not against you.

How to consolidate your debt effectively

1. Understand the process thoroughly

Debt consolidation is taking out a single loan to pay off all your debts. It can also be a balance transfer from multiple credit cards to one card that you already have. Ideally, the new loan or card will have a low enough interest rate to make repayments more manageable.

Whether it saves you money depends on these factors:

• Interest rates: If you can qualify for a debt consolidation loan with a significantly lower interest rate than your existing debts, you’ll save money on interest charges in the long run. For instance, if you have credit cards with high annual percentage rates or APRs (around 20%) and consolidate them into a personal loan with a 10% APR, you’ll come out ahead.
• Fees: Debt consolidation loans can help you avoid ongoing fees associated with debts, such as account maintenance fees, transaction fees, late payment penalties, and so on.

2. Check your eligibility for a debt consolidation loan

It’s rare for a debt consolidation application to be outright rejected. Even with a lower credit score, you may still have debt consolidation options available although you might be offered a higher consolidation loan interest rate and potentially less favourable loan terms.

But even if you qualify for a debt consolidation loan, resist the urge to jump in immediately. Carefully assess your current financial situation and the loan terms offered. Can you comfortably afford the monthly payments over the entire loan term? Will this consolidation lighten your financial burden, or will it create a larger monthly payment that could become difficult to manage?

3. Research and compare different debt consolidation options

To consolidate debts, you generally have these three options, depending on your current debts and/or financial circumstances:

• Balance transfer: As we mentioned earlier, you can consolidate credit card debts into one card. These cards usually offer a 0% introductory APR period on transferred balances, temporarily halting interest accrual on your existing credit card debt. However, be mindful of the balance transfer fee and the high APR that kicks in after the introductory period ends.
• Secured debt consolidation loans: These personal loans require using an asset, like your car or house, as collateral. This typically allows you to qualify for a lower interest rate than unsecured loans. However, you risk losing your collateral if you default on the loan.
• Unsecured debt consolidation loans: These personal loans don’t require collateral but may have a higher interest rate than secured loans. They offer more flexibility but require strong creditworthiness to qualify for favourable terms.

No matter which loan you’re considering, understand all the costs involved. This includes the interest rate, which can be fixed or variable. Be sure to factor in any fees associated with the loan as well, such as application fees, monthly maintenance charges, or late fees.

The loan term is another crucial aspect. This will influence your monthly payment amount and the total duration of your repayment commitment. Finally, see if the loan offers any features that benefit you, such as making extra payments without incurring additional fees. This flexibility can help you repay the loan faster and save money on interest in the long run.

4. Beware of misleading offers

Debt consolidation, unfortunately, attracts credit providers who prey on vulnerable individuals. So, to be on the safe side, avoid companies that:

• offer quick fixes
• unrealistic promises of debt elimination
• asks for upfront fees
• asks you to sign blank documents
• are unlicensed
• rush you to make a decision
• don’t explain the terms or repayment conditions fully
• don’t reveal other costs involved

5. Protect yourself from scams

Predatory lenders aren’t the only threat – there’s another layer of schemers to be aware of. To protect yourself, ensure the lender is licensed by the Australian Securities and Investment Commission (ASIC).

Also, while there are smaller, legitimate consolidation companies, it’s generally safer to deal with established financial institutions. These institutions have a reputation to uphold and are subject to stricter regulations.

6. Know the risks of debt consolidations

As we mentioned earlier, debt consolidation comes with disadvantages.

For example, consolidation can lead to higher overall payments if the term is extended even with a lower monthly payment. Creditors may also see a large consolidation loan as a major financial risk, potentially harming your credit score in the short term.

There’s also the temptation to overspend. If you don’t address the underlying spending habits that led to debt in the first place, you could end up deeper in debt.

7. Talk to a financial counsellor (recommended)

Debt consolidation is a serious undertaking that can have a long-term impact. Talk to a debt consolidation before finalising your decision. They can assess your financial situation, including income, expenses, debt types, and credit score. Based on this analysis, they can recommend the most suitable debt consolidation strategy for you.

If a consolidated loan does not suit you now, they may be able to recommend other ways of managing debt, such as helping you budget your money or applying for financial hardship.

Debt Consolidation Help with Debt Negotiators

Talk to us about debt consolidation. Our first step is a no-obligation financial assessment, which will give us a clear picture of your financial situation and budget.  

Once completed, we will gladly offer you free, impartial financial guidance.  We’ll help you manage your money more effectively, assess your eligibility for debt consolidation or identify the best option for your circumstances.