Managing your cash flow can be stressful even at the best of times. If you have existing debt in the form of personal loans, a home loan, or multiple credit cards, things can get complicated fast. When you add emergency expenses and unexpected life moments into the mix, you may begin to feel as if your financial security is slipping.

If you’re feeling overwhelmed by your financial obligations, or you’d simply like to have more control over your cashflow, consolidating your debts might be the answer you’re looking for.

What is debt consolidation?

Debt consolidation involves taking stock of all your existing individual debts and rolling them into one. Think of it like cleaning up all the mess throughout your house and moving your excess stuff into a single, spare room. It’s still there, but you may feel it’s more manageable because it’s all in one place.

Though debt consolidation may help you to better manage your loan repayments, it could also make your situation worse. Sometimes the interest rate or fees on a consolidated loan can be higher than they were with your original debts. 

According to ASIC’s Moneysmart hub, there are a few things you should check before signing on the dotted line:

• Interest rates, fees and charges to make sure you’ll actually be better off.  
• The loan term. If the loan is longer but with a smaller interest rate, you still may end up paying more fees or interest.

How does debt consolidation work?

Debt consolidation works by combining existing debts into one loan, with one interest rate. For example, if you have credit card debt and a car loan you’re likely to have two different rates of interest. You’ll also need to make two repayments each week, fortnight or month to cover both debts. By consolidating these debts into one loan, you’ll only make one repayment each week, fortnight or month depending on your preference over a set period.

Debt consolidation is quite common. Many people choose to consolidate their debts as a way of simplifying their finances. It’s important to remember that while debt consolidation can make it easier to repay your loans, it won’t reduce the overall balance you owe.

If you’re experiencing financial difficulty and you need relief from your loans, let your bank know as soon as you can. Depending on your circumstances, they may be able to support you by reducing the amount or frequency of your loan repayments.

Learn more about debt management

Making financial decisions, such as whether to consolidate your debts, can be daunting. That’s where seeking advice from a financial planner could come in handy. A financial planner will work with you to establish your money-related goals and break down the steps to achieving them. ASIC's Moneysmart can help you choose an adviser suited to you.

Published 14 March 2022