How do I consolidate debts and get my finances under control?
- Nathan Torre
- 4 minutes ago
- 6 min read
Managing several debts at once can become complicated.
You might have a home loan, credit card, personal loan or other debts, all with different interest rates, repayment dates and fees. Add everyday household expenses into the mix and it can become difficult to see where your money is actually going.
Debt consolidation is one option, but it shouldn't necessarily be considered in isolation.
Aspire2Wealth adviser Nathan Torre explores how to consolidate debts effectively, when refinancing might be worth considering and some of the everyday changes that can help you take greater control of your finances.
How to consolidate debts effectively
Debt consolidation generally means combining multiple debts into a single loan.
Instead of making several repayments each month, you make one repayment towards the consolidated debt.
Depending on your circumstances, this could involve refinancing existing loans or, for some homeowners, considering whether debts can be incorporated into a home loan.
Before doing anything, start by understanding exactly what you owe.
Look at each debt and record the outstanding balance, interest rate, fees, minimum repayment and remaining term.
The Australian Government's MoneySmart guidance on debt consolidation and refinancing recommends carefully comparing the costs before switching loans.
The aim isn't simply to reduce the number of repayments you have. You need to understand whether the new arrangement could actually improve your financial position.
Is it a good idea to consolidate my debts?
It depends on your circumstances and the terms of the new loan.
One potential advantage is simplicity. Instead of keeping track of several lenders and repayment dates, you may have one loan and one regular repayment.
You may also be able to obtain a lower interest rate.
But a lower interest rate or smaller monthly repayment doesn't necessarily mean you'll pay less overall.
Fees and the length of the new loan can make a significant difference. A lower monthly repayment may simply mean you're repaying the debt for longer.
That's why it's important to look at the total cost rather than the repayment alone.
Can I consolidate debt into my home loan?
For homeowners, refinancing a mortgage can sometimes create an opportunity to consolidate other debts into the home loan.
Home loan interest rates can be lower than rates charged on credit cards or personal loans, which can make this approach look attractive.
But there is an important trade-off.
If a debt that could have been repaid within a few years is added to a mortgage with many years remaining, you could potentially pay interest on that debt for considerably longer.
There is also a difference between unsecured consumer debt and debt secured against your property.
MoneySmart recommends carefully considering the consequences of turning unsecured debt into secured debt when consolidating.
Before proceeding, compare the interest rate, fees, loan term and total amount you are likely to repay, rather than focusing only on the new monthly repayment.
When should I review my home loan?
Debt consolidation isn't the only reason to take another look at your mortgage.
Many homeowners set up their home loan and then don't revisit it for years.
Meanwhile, rates, products and personal circumstances change.
Even asking your existing lender whether they can offer a more competitive rate can sometimes make a difference.
A recent example came from within the Aspire2Wealth team. A simple call to a lender asking whether they could improve an existing home loan resulted in the rate being reduced by around 0.1 percentage points.
It may not sound like a significant change, but small differences can add up over the life of a mortgage.
A home loan review can also consider whether features such as an offset account, redraw facility or your fixed or variable rate structure still suit your circumstances.
Read our guide on how to refinance your home loan for some of the other factors worth considering.
Should I refinance my mortgage to consolidate debt?
Refinancing and debt consolidation are related, but they're not the same thing.
Refinancing means replacing your existing loan with another loan. Debt consolidation involves bringing several debts together.
You can refinance without consolidating debt, and you shouldn't assume that refinancing automatically makes consolidation worthwhile.
If you're considering doing both, look at how the new arrangement affects your finances as a whole.
What will you pay in fees? How long will the new loan run? What happens to your repayments? Most importantly, what is the likely total cost over the life of the loan?
These questions provide a much better basis for comparison than the advertised interest rate alone.
Will debt consolidation help me get out of debt?
Debt consolidation can change how your debt is structured. It doesn't necessarily address why the debt accumulated.
For example, you might consolidate several credit card balances into another loan and clear the cards.
If you then start using those credit cards again, you could eventually find yourself managing the consolidation loan as well as new credit card balances.
This is why managing debt and managing your everyday cash flow often need to go together.
Look at what caused the debt to accumulate. Are your regular expenses higher than your income? Have small recurring costs gradually built up? Could some expenses be reduced and the money redirected towards debt?
If the underlying cash flow problem remains, changing the structure of your loans may only address part of the problem.
How can I find extra money to pay off debt?
Your bank statements are a useful place to start.
Look at automatic payments and recurring expenses that you may have stopped noticing.
Streaming services, gym memberships, apps, cloud storage, utilities, mobile phone plans and other subscriptions can individually seem relatively insignificant.
Together, they can add up.
One Aspire2Wealth client had accumulated seven different streaming services costing between approximately $20 and $40 each per month.
After reviewing what was actually being used, the number of subscriptions was reduced. This freed up around $100 to $150 each month, potentially more than $1,000 over a year.
A useful question when reviewing recurring spending is:
If I wasn't already paying for this, would I sign up for it today?
If the answer is no, consider whether you still need it.
More importantly, decide what happens to the money you save.
If reducing debt is your priority, redirecting those savings towards repayments gives the money a clear purpose.
When should I speak to a mortgage broker about my debt?
If your mortgage forms part of the picture, a mortgage broker can help you understand the lending options available and compare different loan structures.
That should involve looking beyond the headline interest rate.
Fees, loan features, repayment periods and the total cost of borrowing can all affect whether refinancing or consolidation makes financial sense.
Aspire2Wealth's mortgage and finance team in Perth can compare options from a panel of lenders and help you understand how different lending structures could affect your circumstances.
If you're struggling to meet your repayments, however, another loan may not be the appropriate first step.
Free and confidential financial counselling is available through the National Debt Helpline. MoneySmart also provides information about getting debt under control.
Look at your finances as a whole
Debt rarely exists in isolation.
Your mortgage, household spending, savings, insurance and other commitments all influence how much money you have available and what you can realistically put towards reducing debt.
That's why getting your finances under control isn't necessarily about finding one big solution.
Start by understanding what you owe and where your money is going. Review whether your mortgage and other loans still suit your circumstances. Look for expenses you no longer need and consider whether consolidation or refinancing could genuinely improve your position.
Small changes can become meaningful when they're working towards the same goal.
If you're in Perth and would like to understand your mortgage, debt consolidation or refinancing options, speak with the Aspire2Wealth team.
Sources:
Australian Government MoneySmart: Debt consolidation and refinancing
National Debt Helpline: Free financial counselling
Aspire2Wealth adviser interview with Nathan Torre.
Aspire2 Wealth Advisers Pty Ltd ABN 42 125 897 903 is an authorised representative and credit representative of Charter Financial Planning Limited ABN 35 002 976 294, AFSL and Australian Credit Licence No. 234665.
This website contains information that is general in nature. It does not take into account the objectives, financial situation, or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. DO NOT ALTER THE DISLAIMER
