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Consolidating debt with a personal loan vs home loan

Written by

Shaun McGowan

Debt consolidation is a way of unifying your debts and simplifying your repayments while helping you save money. There are various ways to consolidate debt, but the two options we’ll look at today are using your existing home loan, or a new personal loan.

As with any financial decision, make sure you speak to a financial adviser before committing to a debt consolidation loan. These financial experts can assess your current situation and advise you on the most suitable course of action.

What is a debt consolidation loan?

A debt consolidation loan can be used to pay off other debt, like credit cards, other personal loans and store cards, and roll it into one easy-to-manage loan.

A debt consolidation loan should have lower interest rates and fees than your other debts when combined - you want your debt consolidation to reduce the interest you pay or the time it takes you to clear debt.

Two common ways to consolidate debt are to apply for a new personal loan, or to transfer the debt onto an existing home loan.

Consolidating your debt into a personal loan

If you choose to consolidate your debt using a new personal loan, you’ll need to apply with a lender as you would with any other type of finance.

However, there are some essential considerations when choosing a debt consolidation personal loan which you may not be familiar with if you haven’t applied for a loan before.

Debt consolidation with Money Matchmaker

Your two considerations are

A secured or unsecured loan

  • A secured debt consolidation loan requires you to use an asset like a vehicle or property as security for the loan. Secured loans generally have lower interest rates but you risk having the security taken by the lender and sold if you cannot meet your repayments.
  • Unsecured debt consolidation loans do not require security, and often have higher rates as a result. This may not be beneficial if you are looking to minimise your interest charges when consolidating debt.

Fixed or variable interest rates

  • Fixed interest rates stay the same for a set period or for the entire term of the debt consolidation loan, which ensures you know exactly how much your repayments will be throughout the loan term. On the other hand, fixed interest rates can be less flexible. You may be charged fees if you make extra repayments or repay the loan early.
  • Variable interest rates can go up and down at any time - this means that your repayment amounts could change, which could make budgeting and paying off your debt more difficult. However, variable loans offer more flexibility and you may not be charged fees for making extra repayments or paying your loan off early.
Fixed interest rateVariable interest rate

Your interest rate stays the same for a fixed period of time

Your interest rate goes up & down with the market

Less flexible - you may be charged fees for making extra repayments or repaying your loan earlier

More flexible - you may not be charged fees for making extra repayments or repaying your loan early

Consolidating your debt into your home loan

Home loan interest rates are usually much lower than other types of household debt, such as personal loans, credit cards and car loans.

If you have an existing home loan, you can consolidate debt by simply increasing your loan amount by the available equity in your property - if you have a $500,000 mortgage and have paid $50,000, you will have an estimate of $50,000 worth of equity to leverage.

However, the term of these loans is much longer, which means you’ll pay more interest on the balance over time.

Home loans tend to have long terms of up to 30 years, while most personal loan products have terms up to 10 years. As a general rule, the longer the loan term, the higher the total interest cost of the loan.

In the table below, you’ll see a comparison of a $20,000 debt consolidated with a home loan, and with a personal loan.

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Home loan debt consolidation vs Personal loan debt consolidation

Home Loan ConsolidationPersonal Loan Consolidation

Loan amount

$20,000

$20,000

Loan term

25

5

Interest rate

2.54%

4.95%

Comparison rate

4.25% (includes all upfront and ongoing fees)

4.95% (includes all upfront and ongoing fees)

Monthly repayment amount

$91 for first 2 years then $111 for remaining loan

$377

Total interest paid

$12,916

$2,618

Total loan cost

$32,916

$22,618

About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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