Debt Consolidation: One Loan, One Plan, One Step Forward

Managing several debts can be exhausting. There are different repayment dates, interest rates and accounts to monitor—and it can sometimes feel as though the balances barely move.

Debt consolidation involves combining multiple eligible debts into one new loan. Instead of managing several repayments, you make one regular repayment to one lender.

This may make your debt easier to manage and, in some circumstances, reduce the interest and fees you pay. However, whether it saves you money will depend on the new loan’s interest rate, comparison rate, fees, term and repayment structure.

The mental load of managing several debts is real—and it can affect more than your bank balance.

How Does Debt Consolidation Work?

A debt-consolidation loan may be used to repay debts such as:

• credit cards;

• personal loans;

• store cards; and

• some buy now, pay later balances.

You then repay the new loan over an agreed period.

Personal loans generally have structured repayments and a defined loan term. This can provide a clearer repayment path than revolving credit-card debt, provided the repayments are affordable and the total loan cost is competitive.

Could Debt Consolidation Save You Money?

If you qualify for a personal loan with a lower overall cost than your existing debts, consolidation may reduce the interest you pay.

However, the advertised interest rate is only part of the comparison. Application fees, ongoing fees, early repayment charges and the length of the new loan can all affect the final cost.

An Illustrative Example

Suppose someone has:

At 10% p.a., a $10,000 loan repaid over three years would cost approximately $323 per month and around $1,600 in interest, before fees.

The cost and repayment period for the credit cards would depend on how much the person pays each month. Paying only the required minimum could take considerably longer and result in substantially more interest.

This example is illustrative only. Actual rates, repayments, fees, eligibility requirements and savings will vary.

Paying only the minimum amount on a credit card can significantly extend the repayment period and increase the total interest paid.

Moneysmart notes that credit-card minimum repayments are commonly calculated as a percentage of the closing balance—often 2% or 2.5%—or a minimum dollar amount. They are not simply monthly interest charges. Moneysmart credit-card calculator

What If Your Credit Score Needs Work?

A lower credit score may affect:

• whether your application is approved;

• the interest rate you are offered;

• how much you can borrow; and

• the loan conditions available to you.

Consolidation might still make repayments easier to manage, but simplicity alone does not necessarily mean the new loan is cheaper.

Before proceeding, compare:

• the new loan’s comparison rate;

• all application and ongoing fees;

• the total amount repayable;

• the length of the loan;

• whether the repayments are affordable; and

• whether any assets are being used as security.

If the new loan has a similar or higher overall cost, another debt-repayment strategy may be more suitable.

Millie tip: Checking your credit information before applying can help you understand your current position. Remember that different lenders use their own eligibility and assessment criteria, and checking a score does not guarantee approval.

Potential Benefits of Debt Consolidation

Depending on the loan and your circumstances, consolidation may provide:

One Regular Repayment

Having one repayment date may make your debts easier to monitor and reduce some of the administrative load.

A Defined Repayment Term

Unlike revolving credit, a personal loan generally has an agreed repayment period and scheduled end date.

Potential Interest Savings

You may pay less interest if the new loan has a lower total cost and you do not extend the debt over an unnecessarily long term.

Easier Progress Tracking

One balance and a structured repayment schedule may make it easier to see your debt decreasing.

Risks to Consider

Debt consolidation is not automatically the right option. Potential risks include:

• paying a higher interest rate or additional fees;

• extending the loan term and paying more overall;

• continuing to use the cleared credit cards and accumulating new debt;

• early repayment or establishment fees;

• applying for several loans and adding credit enquiries to your report; and

• converting unsecured debt into secured debt.

Be particularly cautious about using your home or car as security. If you cannot meet the repayments, the secured asset may be at risk.

What to Compare Before Applying

Comparison Rate

The comparison rate combines the interest rate with certain fees to provide a better indication of the loan’s cost. However, it is based on a particular loan amount and term, so it may not reflect your exact circumstances. Moneysmart personal-loan guidance

Total Amount Repayable

Look beyond the monthly repayment. A smaller repayment over a longer period can sometimes cost more overall.

Loan Term

A shorter term usually means higher monthly repayments but less interest over the life of the loan. The repayments still need to fit comfortably within your budget.

Early Repayment Conditions

Check whether you can make additional repayments or repay the loan early without a fee.

Fixed or Variable Interest

A fixed rate may provide greater repayment certainty. A variable rate can change during the loan term.

Secured or Unsecured Loan

A secured loan may offer a lower rate, but the asset used as security could be at risk if repayments are missed.

Is Debt Consolidation Right for You?

Debt consolidation may be worth exploring if it:

• lowers the total cost of your debts;

• provides affordable repayments;

• gives you a manageable repayment term; and

• helps you avoid taking on further debt.

It may not be suitable if the new loan is more expensive, extends the debt significantly or places an important asset at risk.

If you are already struggling with repayments, consider contacting your lender’s financial-hardship team or a free financial counsellor before applying for another loan.

Ready to Understand Your Numbers?

Join Millie and connect your eligible accounts using open banking to build a clearer picture of your balances, repayments and cash flow.

You can then explore available tools and lending options through Millie’s Australian lending partners.

If a qualifying loan is approved through an eligible Millie lending partner, you may also receive a $100 Millie Visa Card, subject to the applicable offer terms and eligibility requirements.

Explore debt consolidation with Millie

General information only. This content does not take into account your objectives, financial situation or needs and does not constitute financial, credit or legal advice. Consider whether any loan is appropriate for your circumstances and review the lender’s terms, fees, eligibility criteria and applicable disclosures. Millie may receive referral fees from lending partners. Any promotional reward is subject to separate eligibility criteria and offer terms.