Debt consolidation in Australia

Debt consolidation is a piece of arithmetic that marketing departments prefer to describe as a fresh start. The pitch is simple: several balances, one repayment, a lower rate. Sometimes the arithmetic agrees. Sometimes the only number that falls is the monthly instalment, because the term has been stretched, a fee has been capitalised, or an unsecured mess has been bolted onto a car or a house. Those are different outcomes.

This is general information for readers in Australia. It is not a recommendation to consolidate, refinance, or leave existing contracts alone. Credit Made Simple is not an Australian credit licensee and does not provide credit assistance.

What is being rolled, exactly

A consolidation is a new credit contract used to pay out old ones. The old contracts might be credit cards, store cards, personal loans, overdrafts, or a mix. The new contract might be an unsecured personal loan, a loan secured by a car, a further advance on a home loan, or — less often advertised under this name — a balance transfer card. Each of those has a different interest structure, a different fee schedule, and a different enforcement path.

Before anyone talks about rate, list the debts. For each: the current balance, the interest rate actually applying (not the residual rate you were on during a promotion), the minimum repayment, any early-exit or residual-break cost, and whether the facility is secured. Then add the costs of the new loan: establishment fee, brokerage if any, security-registration fees, discharge fees on the old loans, and the comparison rate. Comparison rates exist in Australian law because a headline rate is an incomplete sentence.

A hypothetical, labelled as such. Suppose three cards at high residual rates, total balance $18,000, and a proposed three-year unsecured loan at a lower rate with a $400 establishment fee. If the new interest-plus-fee cost over three years is genuinely less than the interest you would have paid by systematically paying the cards down — and if you do not reload the cards — the consolidation has done the job the brochure describes. If the same balance is instead placed on a seven-year car-secured loan so that the weekly figure looks gentle, you may pay more interest, not less, and you have given someone a goods mortgage over the vehicle. The weekly figure is not the test.

When a lower rate is real, and when the term is doing the work

Interest is charged on a declining balance. Extending the term reduces the instalment and increases the number of times interest is calculated. That can still be rational if the alternative is default, collections, and a judgment. It is not a saving. It is a purchase of time. People are entitled to purchase time. They are not entitled to be told that the purchase is a discount.

A genuine reduction in interest cost usually needs three facts to be true at once. The new annual percentage rate, once fees are included, is lower than the blended rate you are actually paying. The new term is not so long that the extra months eat the rate difference. And the old facilities are closed or, at minimum, not reused for the same spending. The third fact is the one consolidation advertising skips. A card with a zero balance and an open limit is not a closed chapter. It is a loaded limit. If the spending that created the balances continues, you will have the new loan and the old balances.

Serviceability assessment on the new application will look at existing limits, not only existing balances. That is one reason how lenders assess serviceability belongs in the same reading list as this piece. A lender that ignores open card limits is not doing you a kindness; it is building a file that may later be argued about under responsible lending rules that still apply. A lender that insists the cards be cancelled as a condition of settlement is making a credit decision. Whether you accept that condition is a decision this journal will not make for you.

Balance-transfer cards are a cousin, not a twin. They can move revolving balances onto a promotional rate for a defined period, usually with a transfer fee. When the period ends, the residual rate applies to whatever remains. That product is covered in balance transfers explained. It is consolidation only if you treat the promotional window as a repayment plan rather than as a cheaper place to park the same spending.

Small amount credit contracts are a poor candidate for being the destination of a consolidation, and they are an expensive thing to leave sitting while you think. Their cost cap — a well-known twenty per cent establishment fee and four per cent per month on the amount advanced — is not a bargain rate in disguise. See payday loans and SACCs. Rolling a SACC into a longer personal loan can reduce the monthly percentage cost and can also turn a short, expensive contract into a long, secured one. Those results need to be separated.

Security over a car or a house

Unsecured credit is collected with letters, listings and, if it goes far enough, a court. Secured credit is collected with those tools and with a right against the asset. That is the trade that produces the lower rate.

A personal loan secured by a car will usually be registered on the Personal Property Securities Register. If you default, the financier’s pathway is repossession and sale, then a demand for any shortfall. The fact that the original debts were cards does not make the car a moral exception. You have changed the collateral. Read secured versus unsecured personal loans before treating the rate gap as free money.

Using a house is a larger version of the same trade. A further advance or a refinance that clears cards by increasing the home loan puts unsecured, typically shorter-rate consumer debt onto a long, mortgage-backed term. The instalment will look smaller. The interest may run for decades. The enforcement pathway at the far end is possession of the home. Lenders’ mortgage insurance, if the new loan-to-value ratio requires it, is an extra cost that protects the lender, not you. Those levers are described in home loans, LVR, LMI, offset and redraw. None of them is a reason to consolidate, and none is a reason not to. They are reasons to do the addition.

Guarantors complicate the picture further. If a parent is asked to secure a consolidation, the “one repayment” is no longer only your problem. That is credit assistance territory for anyone who is suggesting the structure, and it is a counselling conversation for the household.

Fees, comparison rates and the bits that do not fit on a banner

Establishment fees can be added to the loan and then attract interest. Brokerage can be paid by you, by the lender, or both; it still has to be disclosed. Discharge fees on the old loans, especially fixed-rate personal loans or some car contracts, can erase a modest rate win. Direct-debit dishonour fees on the new loan will recreate the old pattern if the budget was the problem and the term was the only thing that changed.

The comparison rate is the statutory attempt to put rate and certain fees on one line for a typical amount and term. It is not a quote. It does not include every cost that will appear in a real application, and it does not include the cost of keeping the old cards open. Use it to compare like with like, not as a verdict.

Early repayment of the new loan may itself attract a fee. If your plan is to consolidate and then pay the new loan off in a year, check whether the contract punishes that plan. Some do.

Credit reporting will show a new enquiry and a new account. Paying out old accounts should eventually show them as closed. A cluster of enquiries in a short period is one of the things that can weigh on a file. Shopping the same product across half a dozen websites in a fortnight is not a neutral activity.

Who is allowed to suggest the particular loan

A website that ranks “best consolidation loans” and pushes an apply button is close to the legal line, and some of those sites sit on it with an Australian credit licence. A broker who suggests a particular contract with a particular lender is giving credit assistance. That is a licensed activity under the NCCP Act. The distinction, and why this journal stays on the information side of it, is the subject of credit licences and credit assistance.

If you are already in arrears, consolidation is not a substitute for a hardship variation. A new loan that is approved by ignoring current arrears, or by refinancing a default into a secured facility without a budget that works, can move the problem into a worse legal category. If you cannot meet the current obligations, talk to the existing providers and to the National Debt Helpline on 1800 007 007 before you treat a refinance advertisement as the process.

What this page will not do

It will not tell you that consolidation is always a trap. It is not. People with several high-rate revolving balances, a stable income, and a willingness to close the old limits sometimes reduce the interest they will pay and the number of due dates they must not miss. That is a real, unromantic win.

It will not tell you that a lower weekly figure is the win. It often is not. It will not tell you to put card debt on a house because a calculator said the cash-flow looks neater. And it will not introduce you to a lender. If you want a second pair of eyes that is not selling a loan, use a free financial counsellor. Consolidation is a tool. Like most credit tools, it is at its most expensive when it is sold as a feeling.