You may have heard about debt consolidation in passing. For example, someone you know may have gone through the process, or you may have seen an advert online that claims to reduce your monthly payments.

But what is debt consolidation? What does the process entail? And is it a viable option for me?

It would be best to ask these fundamental questions before using one of WeMoney’s partners to consolidate your repayments.

Millennials and Gen Z have on average, $56,772 and $44,967 of personal debt, respectively, across multiple providers. This personal debt consists of credit cards, personal loans, and business debt.

Suppose you are inundated with a range of debts with different repayment rates, dates, and terms. In that case, debt consolidation may be a viable option for you to simplify your finances, reducing your overall monthly repayments.

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Let's get to the following commonly asked questions:

What is debt consolidation?

What are the benefits of debt consolidation loans?

What are the two types of consolidation loans?

How does debt consolidation impact your credit score?

How to consolidate your debts?

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When an individual consolidates their debt, they agree with an additional creditor. This provider will close out all customers’ existing debts and roll them into a single financial product.

This means that an individual who had three debts with different providers will now only have one debt with set repayment dates. The value of this new financial product will be the total money paid to close out all of the customers’ existing loans/debt.

More importantly, an individual that chooses to consolidate their debt will now only have a single interest rate.

Note: Debt consolidation companies will label their financial products with buzz words and company-specific branding – however, you are essentially getting a consolidation loan.

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The benefits of consolidation loans are different for each individual and the type of debt. Seek independent financial advice before applying for any financial product.

There are three general benefits of taking out a consolidation loan.

Fixed payment terms: Know what’s due and when.

A lower interest rate: This depends on your specific circumstances and creditworthiness.

A single monthly payment: Some providers may tailor your repayment terms to your specific needs. It is worth discussing this with one of our many providers.

Note: If you do get a debt consolidation loan, then it is always a good idea to pay off the loan as fast as possible. Managing debt is hard, and if you are able to pay it off faster, then you will be on the road to financial stability.

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Whilst consolidation loans remain practically universal in their operation. Two key variations are essential to consider.

When you apply for a consolidation loan, you may be asked whether you want to secure your loan with an asset such as property or your vehicle. This is known as a secured loan – your asset will then be tendered as collateral if you default on your agreed repayments.

Conversely, you may have the option of taking out an unsecured consolidation loan where no assets are required as collateral. Generally, unsecured loans will have more stringent eligibility requirements, such as a higher income or credit score.

Important: Please consult an independent financial advisor on which type of consolidation loan will be best in your specific circumstances.

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There seems to be a perception that debt consolidation is only for those who are bankrupt and in a dire financial position, and this could not be further from the truth.

While many people take out consolidation loans when they have copious amounts of debt, those who benefit the most from consolidation are Australians in a healthy financial position who earn a decent wage and are smart with their money.

This cohort of people is also most likely to be approved for the best interest rate and save the most money for consolidation loans.

In 2019, Australians racked up over 3.000.000.000 purchases on credit cards, increasing decade on a decade since 2010. According to the Reserve Bank of Australia, with an average interest rate on each card of 19.94% as of August 2021, those paying multiple debts with different interest rates are markedly worse off.

As credit card and personal loan balances grow and interest quickly accrues, it may be wise to consider a consolidation loan to simplify your household’s finances and save up to 50% on your repayments.

Important: A credit card balance transfer allows you to transfer the amount of money you owe on one credit to another. This is another way to consolidate your debt — and it only acts as a debt relief strategy if you are in fact budgeting and looking to create the debt snowball effect. But, if you undergo a balance transfer and are careless with things like budgeting and spending, then this could have serious consequences and negatively affect your credit score.

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When applying for a consolidation loan, your credit score may be negatively impacted as providers complete hard credit checks with the relevant bureaus.

Every time you apply for a financial product, the business will run a credit check to determine your worthiness for that specific product — if an individual applies for multiple products, they may be seen as an irresponsible borrower and have their score lowered.

However, suppose you proceed to pay off your consolidation loan on time and without default. In that case, this will improve your credit score as the providers will see you as a trustworthy and responsible borrower.

When in doubt, remember the following saying: “Less debt means better credit.” It’s as simple as that.

Note: Loan calculators are useful are especially helpful as they will allow you to work out your minimum repayments. Be aware that some repayment calculators will not cater to some things like ‘bank fees,’ which could impact your monthly contributions.

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After you have sought financial advice from a registered financial advisor, the next step will be to find interest rates (or fees) that are less than the rate that you are currently paying. It is important to point out that the interest rate can sometimes be higher than your current rate — which is subject to the macro environment — and your personal financial situation.

Compare the fees and rates for several financial institutions to make sure you get a good deal.

Check your credit score. If you have a bad credit score, then it might be better to postpone refinancing — and instead, focus on repairing your credit as the loan application could hurt your credit.

Do check the fees and charges, for example; an unsecured personal loan may carry higher interest and fees when compared to secured loans.

Seek financial advice to help you create a debt management plan (DMP) if you are suffering from financial hardship.

Check that the financial institution plus your financial counsellors have the appropriate licensing. For example, an Australian financial service licence (AFSL), and an Australian credit licence (ACL). To learn more about specific credit licensees, please visit the Australian Securities and Investments Commission website to find out more information.

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Consider using one of WeMoney’s debt consolidation partners to pave your way to a more straightforward financial future. Once again, always seek independent financial and legal advice before applying for any financial product through WeMoney or a third party.

Important: If you are looking to consolidate debts purchased via a family trust (e.g. a home loan), you will need to go through the business banking department at a bank — and will require you to submit a different form.

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WeMoney has a variety of debt consolidation partners available to assist you, should you decide that this is the right path for your financial circumstances. Those with the highest credit scores and the most stable jobs are often the prime candidates for consolidation and refinancing loans.

Talk to your independent financial advisor today about how you could be saving money on every repayment with one of our partners.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.