What Types of Debt Can Be Combined Through Debt Consolidation?

Debt consolidation may allow eligible borrowers to combine certain debts, such as credit card balances, personal loans and some other consumer debts, into one loan or credit facility. The debts that can be consolidated depend on the lender, loan structure and borrower’s circumstances. Consolidating debt does not remove what is owed, and a lower repayment does not necessarily mean a lower overall cost. Interest rates, fees, loan terms and total interest should be considered before proceeding.

What Is Debt Consolidation?

Managing several debts can mean keeping track of different repayment dates, interest rates, fees and lenders. Debt consolidation involves replacing or combining eligible existing debts with a new loan or credit arrangement. Instead of maintaining several separate debts, an eligible borrower may have one repayment under the new arrangement. However, debt consolidation does not reduce debt automatically. Whether it lowers the overall cost depends on factors including the new interest rate, fees, loan term and amount borrowed.

Credit Card Debt

Credit card balances are one type of debt that may potentially be included in a debt consolidation arrangement. Someone with balances across several credit cards may consider combining eligible amounts into another loan. This could simplify repayments by replacing multiple accounts with a single repayment. However, the new loan’s overall costs should be compared with the existing debts. Borrowers should also consider what will happen to the credit card accounts after consolidation, as continuing to use available credit could result in additional debt.

Personal Loans

Existing personal loans may also potentially be consolidated. A borrower might have one or several personal loans alongside other debts. Depending on lender requirements, eligible balances may be incorporated into a new debt consolidation loan. Before proceeding, it is important to check whether the existing personal loans have early repayment, discharge or other applicable fees and to consider these costs as part of the comparison.

Store Cards and Retail Credit

Some forms of store or retail credit may potentially be included in a consolidation arrangement, depending on the lender. These accounts can operate similarly to other revolving credit facilities, with outstanding balances and ongoing repayments. Consolidating eligible balances may reduce the number of separate accounts a borrower needs to manage. Eligibility will depend on the particular debt and lender criteria.

Buy Now, Pay Later Commitments

Buy now, pay later arrangements have become another form of financial commitment used by Australian consumers. Whether these balances can be directly included in a particular debt consolidation arrangement depends on the lender and product. Even where they are not consolidated, existing buy now, pay later commitments may still be relevant when a lender assesses an applicant’s financial circumstances. Borrowers should provide accurate information about their existing commitments during a credit application.

Car Loans and Vehicle Finance

In some circumstances, existing car or vehicle finance may potentially form part of a broader debt consolidation strategy. However, vehicle loans can be structured differently from unsecured consumer debts because the vehicle may be used as security. Paying out an existing car loan can therefore involve different requirements and costs. Whether vehicle finance can or should be consolidated depends on the existing agreement, proposed loan and lender criteria.

Can Debt Be Consolidated Into a Home Loan?

Homeowners with sufficient equity may potentially consider refinancing their home loan and incorporating eligible consumer debts into the new mortgage, subject to lender approval and responsible lending requirements. This can result in a different interest rate and repayment structure compared with unsecured debt. However, moving short-term debt into a home loan can extend the period over which the debt is repaid. A lower interest rate or monthly repayment does not necessarily mean a lower total cost. If the debt is repaid over a substantially longer term, the total interest paid could potentially be higher. Securing previously unsecured debt against a home also changes the risk profile because the property is security for the loan. For more information about this type of structure, read Debt Consolidation Through a Home Loan: How to Combine Your Debts & Simplify Your Finances.

What Debts May Not Be Suitable for Consolidation?

Not every financial obligation will necessarily be eligible or appropriate for debt consolidation. Eligibility depends on the lender, product and nature of the debt. Certain debts or liabilities may require separate arrangements and cannot simply be incorporated into a standard consolidation loan. Borrowers should confirm exactly which liabilities a proposed lender will accept rather than assuming every outstanding amount can be included.

How Do Lenders Assess Debt Consolidation Applications?

Applying for debt consolidation generally involves a credit assessment. Depending on the loan, lenders may consider the applicant’s income, expenses, existing debts, credit history and ability to meet the proposed repayments. If property is being used as security, its value and the resulting loan-to-value ratio may also be relevant. Lenders may request statements for debts being consolidated so they can confirm outstanding balances and repayment details. Meeting basic eligibility requirements does not guarantee approval.

Does Debt Consolidation Reduce Your Debt?

Not by itself. Debt consolidation changes how eligible debts are structured rather than automatically reducing the principal amount owed. For example, combining three debts totalling $30,000 generally still means approximately $30,000 needs to be repaid, before taking into account any applicable fees, interest or other costs. The potential benefit is primarily in restructuring eligible debts, but whether that produces a better financial outcome depends on the terms of the new arrangement.

Compare More Than the Monthly Repayment

A lower monthly repayment can appear attractive, but it should not be considered in isolation. Repayments may be reduced simply because the debt is being spread across a longer period. Borrowers should consider the interest rate, comparison rate where applicable, establishment and ongoing fees, loan term and estimated total amount repayable. Where existing loans need to be closed, payout or discharge costs may also need to be considered. You can also read Debt Consolidation Loans: Can They Actually Save You Money? for more on comparing the potential cost of consolidation.

Be Careful About Building Up New Debt

Debt consolidation may simplify existing commitments, but it does not prevent new debt from being accumulated. For example, if credit card balances are consolidated but the cards remain open and continue to be used, the borrower could end up managing the consolidation loan as well as new credit card balances. Considering how existing credit facilities will be managed after consolidation can therefore be an important part of the process.

Credit cards, personal loans and certain other consumer debts may potentially be combined through debt consolidation, but exactly what can be included depends on the lender and loan structure. Consolidating debt does not make the debt disappear, and simplifying several repayments into one does not automatically produce a financial saving. The interest rate, fees, repayment period, total amount repayable and any security provided should all be considered. Understanding both the existing debts and the proposed new arrangement can help borrowers make a more informed comparison before deciding whether to proceed.