Debt Consolidation - what is it and is it right for you?

Personal Finance · 27 May 2015

Frustrated with managing multiple bills and feeling like you’re barely making a dent? If you’re looking to jump start your finances, debt consolidation could help get you on a path…

Frustrated with managing multiple bills and feeling like you’re barely making a dent? If you’re looking to jump start your finances, debt consolidation could help get you on a path to financial freedom.

What is debt consolidation?

Debt consolidation allows people to merge multiple existing debts – such as credit cards, personal loans and hire purchases – into a single loan.

That means no more juggling of numerous interest rates, repayment schedules and amounts with different creditors; debt consolidation simplifies these into one interest rate, one repayment schedule, and one creditor.

The benefits of debt consolidation

If you feel like you’ve barely made a dent in your credit card debt, you’re probably right. For a reality check on why it's important to pay off more than the minimum amount due on your credit card each month, take a look at your bill. It should include a breakdown of the true costs of your credit card debt over time. It can take years to pay off a small amount and in that time you will likely have paid much more in interest than the balance of the card.

If you’re sick of running on the debt treadmill, and want to simplify your bills and pay off your existing debt faster, then debt consolidation could work for you. The best way to find out is do the maths. MoneySmart has a range of useful calculators that can help you work out and compare how much interest you pay if your debt is on credit cards, versus rolling in to your mortgage or consolidating it into a personal loan.  Remember to factor in how long it will take to pay off the debt as that will impact how much you will pay in interest.

Here’s an example of how debt consolidation may save you money:

Jason has a standard credit card at a well-known bank, with a $10,000 balance at 19.95% interest. He also has a low rate card at another bank, with a $4,000 balance at an interest rate of 13.9%.

If Jason only makes the minimum repayments, it could take him almost 15 years to pay off the $4k card, and 25 years to pay off the $10k card. That’s a long time – and a lot of interest – to spend on a credit card purchase.

Knowing this, Jason decides he wants to have each card paid off in 36 months, in which case he’d need to increase his monthly repayments to $509 a month. At the end of the 36 months, he would have paid over $4,000 in interest – much less than he would if he spread it out over 25 years.

But he could save even more if he moved his debt somewhere he could pay less interest.

If Jason has a good credit history and gets a loan from Harmoney at, say, 13.84% – lower than the rate on both of his cards, he will save around $1,000 on interest if he meets the minimum monthly repayments on a 36-month (three-year) personal loan.

Because Harmoney doesn’t charge any early repayment penalties, Jason could increase his monthly payments and aim to pay off the loan in 30 months, saving even more.

Get off the debt treadmill – and stay off.

It’s important to remember that debt consolidation isn’t a cure-all.

If you’re looking at debt consolidation to clear up credit card “overspending”, the most important thing to do is cancel your cards, or at least put them away somewhere safe so you don't use them.

Think of a debt consolidation personal loan like a nicotine patch – lessening temptation by giving you the chance to ditch the cards – it’ll help, but only if you put in the effort too.

Keeping your finances focused is another crucial step in getting out of debt. Budgeting is key to making your finances work. Knowing your regular outgoings and separating the wants and the needs will help you assess what you can and can’t afford – and if you can afford to pay more than the monthly minimum on any of your debts, it could save you hundreds, or even thousands.

Put a fixed date on being debt free.

Find out how much you could save by consolidating your debt with a Harmoney personal loan. Start the no obligation application process – you’ll find out exactly how much it will cost, and could be on your way to financial freedom in just a few days.

Other articles you might like:

Learning to love your budget

Spring clean your finances

Credit Score Bootcamp

General Advice Disclaimer

The information contained on this website is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.


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