Useful Tips

Debt consolidation – Risks & Benefits

Every lender has their own terms and conditions, and this is intended only as a general guide to understanding this topic. Contact us to discuss your individual circumstances.

Definition
Debt consolidation is where you increase or re-finance your home loan and use the funds to payout credit card, personal loan or car loan debts.

Benefits
Home loans have lower interest rates than unsecured consumer loans like personal loans and credit cards.
Consolidating debts can mean a single monthly repayment rather than managing many.

Disadvantages
If pay over full home loan term of 30 years it could cost you more in interest, so consider paying more than the minimum repayments to reduce the interest you pay overall.
Consolidation can get you even deeper into debt by letting you borrow more money. So once you’ve consolidated your debts and transferred the balances onto your home loan consider cancelling all of your credit cards and loans. This will stop you being tempted to put new debt onto your credit cards and increasing your overall borrowings.
Even if the interest rate is lower on the new loan, paying off a short-term debt (like a credit card or personal loan) over a very long term means you will still pay more in interest and fees in the long run.

Things to consider

When I help you to organise your debt consolidation, we can run through some repayment options to work out how to repay and reduce your debt within your budget and to make sure that you don’t end up paying more interest over all.

Example effects of interest rates, loan terms, repayments and total interest paid on a $10,000 loan.

Type of loan Interest rate Loan term Repayments per month Total Interest paid
Typical Home loan term Home Loan 5.0% 30 years $54 $9,325
Same loan term as home loan Credit Card 20.0% 30 years $167 $60,157
Typical minimum repayment level Credit Card 20.0% 9 years
2 months
$200 $11,680
Same repayments as credit card Home Loan 5.0% 4 years
9 months
$200 $1,236
Typical Personal Loan term Personal Loan 10.0% 4 years $254 $2,174
Same repayments as personal loan Home Loan 5.0% 3 years
8 months
$254 $945

If you wanted to pay off $10,000 over 5 years:

Example interest rate Repayments per month Total interest paid
Home Loan 5.0% $189 $1323
Personal Loan 10.0% $212 $2748
Credit Card 20.0% $265 $5896

Note: interest rates are examples of comparative rates between different styles of loans and are used for illustration purposes only.