Written byShaun 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.
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.
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.
|Fixed interest rate||Variable 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
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.
|Home Loan Consolidation||Personal Loan Consolidation|
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
Total interest paid
Total loan cost
Money.com.au want to make managing money easy and fun! By giving Australians simple tools so they can make the best decisions they can about their money.
We understand that the world of finance is complex, and offer free, extensive guides on Personal Loans, Car Loans and Business Loans, along with tools like our Budget Planning Spreadsheet to help you better manage and understand personal finance.
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.