Why a debt consolidation loan could be a smart move right now

woman on her laptop applying for a debt consolidating loan

Many Aussies have experience with debt. 

In fact, as of June last year 20% of Australian households have credit card debt, while 33% have other personal debt, according to RBA numbers. 

Meaning a whole lot of people are dealing with making repayments, and in some cases, multiple repayments. But the truth is, keeping your debts separate isn’t always the most financially savvy option - considering where personal loan rates sit right now. 

This is where a debt consolidation can come in handy. 

What is debt consolidation? 

A debt consolidation loan is a type of personal loan that rolls your debts into one. It combines debts that come with a high interest rate, like a credit card or loan, meaning you only make one repayment a month rather than multiple. 

Generally speaking, these loans come with a lower interest rate means you could end up saving a decent stash of cash. Plus, they usually come with a fixed interest rate meaning your repayment won’t change over the life of the loan. 

But what about rolling your mortgage into a consolidation loan?
 

This is a big no no. Because home loans have longer terms (and sometimes lower interest rates) you could actually end up paying more in interest if it is part of a debt consolidation loan. 

Is it smart to consolidate debt? 

The answer is likely yes, and we’ll show you why. 

Recent numbers from APRA and the RBA have revealed that from July 2019 to January 2021 personal loans rates have dropped. Meanwhile, over the same timeframe credit card rates have actually increased. Here’s a rundown:

ProductAverage Rate 31/07/19Average Rate 31/01/21Change
Fixed rate personal loans8.07%7.36%-0.71%
Variable rate personal loans6.71%5.05%-1.66%
Credit Cards16.99%17.43%+0.44%

So what this means is that if you are trying to pay down multiple personal debts, like a credit card debt and a loan with an older interest rate, you may be forking out more in interest than you need to by keeping them separate. 

Instead, if you pay down your debt with a single consolidation loan, you may receive a lower interest rate than the one you have right now and end up savings thousands of dollars! 

Here's an example:


This is your debt:

debt-consolidation-graphic

Total debt: $32,000 

In this scenario, if you were to keep your debts separate, you’d pay a combined monthly repayment of $1,708 costing you $5,892 in interest over three years. 

Alternatively, if you rolled your entire $32,000 worth of debt into a three-year consolidation loan with an interest rate of 7.50%, your monthly repayment would be $995. This means that by the end of the loan term, you would have paid $3,834 in interest and saved a solid $2,058.   

If you already have your eye on a debt consolidation loan and want to find exactly what your monthly repayment could be, take a look at our personal loan repayment calculator

Do consolidation loans hurt your credit? 

Like all forms of credit products, taking out a debt consolidation loan will impact your credit rating. However, this could be positive or negative. 

Because you are likely to be paying down your personal debt at a lower interest rate and in one simple repayment, it may mean you are less likely to miss a repayment and even make extra repayments where you can. By making all your required repayments on time, you can help maintain or build a good credit rating. 

On the other hand, if you consistently miss repayments or default on your loan, this will hurt your credit score. 

RELATED ARTICLE:
How to ditch debt fast in 2021 

Want to start comparing debt consolidation loans right now? Check out these killer options below or head over to our debt consolidation loan hub for more.

Compare debt consolidation loans - rates updated daily

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  • placeholder
    Mozo Experts Choice 2021
    Low Rate Personal Loan (Fixed, Unsecured)

    Excellent Credit

    interest rate
    comparison rate
    Monthly repayment
    5.45% p.a.to 8.48% p.a.
    6.07% p.a.to 8.84% p.a.based on $30,000
    over 5 years
    Go to site
    Details
  • placeholder
    Unsecured Personal Loan

    Fixed

    interest rate
    comparison rate
    Monthly repayment
    6.49% p.a.to 19.95% p.a.
    6.76% p.a.to 20.26% p.a.based on $30,000
    over 5 years
    Go to site
    Details
  • placeholder
    Mozo Experts Choice 2021
    Personal Loan

    Unsecured, Fixed

    interest rate
    comparison rate
    Monthly repayment
    5.45% p.a.to 19.99% p.a.
    5.45% p.a.to 19.99% p.a.based on $30,000
    over 5 years
    Go to site
    Details
  • placeholder
    Unsecured Personal Loan

    Excellent Credit, Fixed

    interest rate
    comparison rate
    Monthly repayment
    5.95% p.a.to 10.49% p.a.
    5.95% p.a.to 12.83% p.a.based on $10,000
    over 3 years
    Go to site
    Details
  • placeholder
    Unsecured Personal Loan

    Fixed

    interest rate
    comparison rate
    Monthly repayment
    5.35% p.a.to 24.79% p.a.
    6.14% p.a.to 25.74% p.a.based on $30,000
    over 5 years
    Go to site
    Details

* WARNING: The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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