What is debt consolidation?

Juggling multiple debts can be overwhelming, particularly if you’re managing different interest rates, repayment schedules and loan terms. Debt consolidation could be a powerful tool to help you regain control of your financial situation and make paying off debts easier. 

Debt consolidation is the process of combining multiple debts into a single loan, often with a lower interest rate, or more favourable terms. Replacing multiple payments with one regular payment could make managing your debts more straightforward and less stressful.

Types of debts that can be consolidated 

Several types of debt can be consolidated, including:

• Credit cards: Consolidating multiple credit cards into one low rate card is called a balance transfer. Some banks may offer a low or 0% introductory interest rate on balance transfers to new credit cards. 
• Personal loans: If you have more than one personal loan, consolidating them into a single loan may make repayments simpler and even reduce the total interest paid. It’s also possible to consolidate multiple types of debts, including credit cards, store balances, and other loans, into one single personal loan. 
• Mortgages: It may be possible to use a home loan top-up or redraw facility on your existing loan to borrow at a lower interest rate than a credit card or personal loan. 

Benefits of debt consolidation

Debt consolidation offers several potential benefits to help you manage your finances more effectively.

Simplified repayments

Making one regular repayment instead of keeping track of multiple due dates, loan amounts and interest rates is a streamlined way of managing debt and could reduce the possibility of missing payments. 

Potential cost savings 

If you’re paying high interest on multiple credit cards or personal loans, combining these into a single loan with a lower interest rate may save you money over time. There’s also the possibility of lower fees on one loan, rather than on multiple individual debts. 

Easier financial management and reduced stress

Reducing the number of debts that you need to monitor may make financial management easier and alleviate the mental burden of keeping track of administration. 

Clearer debt-free timeline

A single loan may provide a clearer view of when you’ll be debt-free. Debt consolidation loans can have fixed repayment terms, so you’ll know exactly when your debt will be paid off – a great motivator! 

How does debt consolidation work? 

Here are the steps typically needed to consolidate your debt: 

• Assess your debts
  It’s time to take stock of all your debts, the outstanding balance, the interest rate, fees, and any prepayment fees for paying out a loan before the agreed term.
• Choose a debt consolidation loan
  Compare loan options and interest rates and look for a loan that offers a lower interest rate than what you’re currently paying on your existing debts. 
• Apply for the loan
  Gather necessary documents and apply. You can apply for a Westpac debt consolidation loan online, and will need to show regular income, a history of regular repayments, and ensure you can cover your expenses. 
• Use the loan to pay off debts
  Once your loan application is approved, the next step is to use the funds to pay off your existing debts. 
• Manage the new loan
  Now you’ve consolidated your debts into a single loan, it’s time to manage this new loan responsibly. Set up a repayment plan and budget and consider setting up automatic payments so you never miss a due date. 

Debt consolidation loan vs. balance transfer

While debt consolidation loans and balance transfers could both ultimately consolidate your debts, there are a few key differences between them.

 

Debt consolidation loans are personal loans used to pay off multiple debts, combining them into one loan with a single regular payment. These might be beneficial for people with multiple types of debt (credit cards, personal loans, store cards) and want to simplify their finances with one payment. 

• Explore Westpac personal loan for debt consolidation

 

A balance transfer involves moving high-interest credit card debt to a new credit card with a lower or 0% introductory interest rate. This option might be beneficial for people with high-interest credit card debt who can pay off the balance within the introductory period. 

• Explore current Westpac balance transfer offers

Considerations before consolidating debt

Remember, debt consolidation doesn’t mean forgetting about your debts, so it’s important to make sure it’s the right option for you. Here are some important considerations:

• Interest rates and fees
  If your primary reason for consolidating debt is to save money on interest and fees, it’s important the new loan offers a lower overall cost. Consider fees such as break costs, early repayment fees or balance transfer fees in your research. 
• Impact on your credit score
  Initially, applying for a new loan may result in a small dip in your credit score due to the application. However, if you manage the consolidation loan responsibly, it could improve your credit score over time. 
• Long-term financial goals
  Whether your aim is to become debt-free, build up your savings, or reduce spending, it’s important to understand how consolidating your debt fits into your longer-term financial goals. This may mean ensuring you have a plan to pay off the new loan and becoming debt-free. 

Alternatives to debt consolidation

Depending on your financial situation, there may be some other strategies for managing debt. This could include debt management plans offered by credit counselling agencies. The agency will negotiate with your creditors and consolidate all your repayments into one repayment. 

 

Credit counselling can help you create a budget and debt repayment plan, as well as financial education and advice. Then, personal budgeting strategies such as cutting expenses or allocating more money towards debt repayment may help you manage your debt without the need for consolidation. 

How to get started with debt consolidation

To get started with debt consolidation, be sure to compare multiple lenders and products to choose the right one for you. It’s also crucial to fully understand the loan terms, including the interest rate, fees, and repayment schedule. 

Westpac has a suite of budgeting tools and resources to help. When it comes to staying on track, there’s SmartPlan, a repayment planner for Westpac personal credit card customers, and Autopay which automatically makes your monthly credit card repayments. 

For personal loan repayments, there’s a repayment calculator to help you estimate how much your repayments could be before you apply.  

And don’t forget that budgeting tools in the Westpac app allow you to compare your spending across categories and track trends in your cash flow. 

To sum up 

Debt consolidation, when done effectively, could allow you to take back control and reduce the excess fees and interest you pay, which in turn may save you money across the period of your loan. It is also important to keep in mind the potential considerations about Debt consolidation and its suitability for your financial needs and goals.

By carefully assessing your debts and choosing the right consolidation option, you could work towards a more manageable financial situation and improve your financial wellbeing.