Some financial institutions and private companies promote debt consolidation as a way to make your debts more manageable. They promise that your repayment will be lower than your current repayments, but that’s not always the case.

Before you agree to a consolidation loan:

• check the total repayments
• check any ongoing fees for your current loans
• compare this to the total repayments for the new loan, including the set-up costs and any ongoing fees.

Then, consider the points below and, if any apply, consider getting advice from one of our financial counsellors before agreeing to it:

• the cost of the new loan will be more expensive overall than your current loans
• the loans you’re paying out won’t be cancelled (so you can avoid getting more debt)
• you’re taking unsecured debt and turning it into secured debt (for example, increasing your home loan to pay out credit card debts).

The risks of consolidating

Getting a new loan or varying an existing loan to pay out a number of other loans comes with some risk. Some of the key ones are listed below.

Longer to pay off

The main downside of a consolidated loan is that it usually takes much longer to repay – and that means it may cost more in the long run.

Fees, charges and interest rates

Make sure that you check the fees, charges and interest rate of the new loan – it may work out more expensive in the long run than if you just kept paying off your multiple debts.

Unsecured into ‘secured’

Before you turn all your unsecured debts (such as credit cards) into a secured debt, remember that the asset given as security (for example, your home) will be on the line if things go wrong. You may also be turning short-term debt into long-term debt. If your home is jointly owned with someone else, you may have to pay the debt if they can’t.

Single borrower debt to joint debt

Take care and make sure you do not take on your partner’s debts in a debt consolidation. Where there is a joint debt, you may end up repaying the debt in full.

Only one lender to negotiate with

When you consolidate into one loan you will have only one lender. If you get into financial difficulty again, you can only negotiate with them.

‘Government backed schemes’ (Part IX Debt Agreement)

Beware of debt consolidation that is actually a Part IX Debt Agreement under the Bankruptcy Act. These debt agreements often mention one payment and a government backed scheme. Debt Agreements have serious consequences and are usually expensive. Always see a financial counsellor before you consider a Debt Agreement.