How it Works: The Pros and Cons of Debt Consolidation Loans

Name: How Do Debt Consolidation Loans Work? - Jacaranda Finance
Brand: Jacaranda Finance
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One option to eliminate your debts and get yourself back on track to financial freedom could be a debt consolidation loan.
Last modified: 8th April 2024
William Jolly | 10 mins read

William Jolly

Content Manager

William is the Content Manager at Jacaranda Finance. He has worked as both a journalist and a media advisor at some of Australia's biggest financial comparison sites such as Canstar, Compare the Market and Savings.com.au, and is passionate about helping Australians find the right money solution for them.

You can get in touch with William via williamj@jacarandafinance.com.au.

Pros and cons of debt consolidation loans

Before applying for a debt consolidation loan, here's a quick summary of the pros and cons of using one. It's important to do your research and understand the pros and cons before signing anything.

Pros	Cons
Pay a lower interest rate on your debts, instead of multiple higher rates One set of fees, if any One repayment deadline to the one lender Potential for improving your credit Fixed rates give you a certainty of repayments Lower repayments by stretching out your debts	You can still accumulate more debt (i.e with credit cards) Missing repayments can damage your credit score further There can still be costs to consolidating debts (transfer fees, ongoing fees etc.) Your loan terms can depend on your credit score Some loans can still have a high interest rate

Australian debt at a glance

According to recent global research, Aussies have the 5th highest level of household debt in the world, with our debts coming in at 203% of disposable income on average.

That means that the average Australian owes twice as much as they earn:

Rank	Country	Household debt	Disposable income	Debt as a % of disposable income
1	Norway	$106,274	$43,149	246.30%
2	Denmark	$93,426	$38,271	244.11%
3	Netherlands	$87,978	$38,552	228.20%
4	Switzerland	$95,638	$43,062	222.09%
5	Australia	$86,392	$42,554	203.02%
6	Sweden	$74,713	$37,709	200.78%
7	South Korea	$56,875	$28,339	200.70%
8	Luxembourg	$93,298	$49,861	187.12%
9	Canada	$71,285	$38,404	185.62%
10	Finland	$57,249	$37,127	154.20%

Source: Invezz, 10 August 2022.

However, Australia is also the third-most debt-conscious country, with this research also finding that Australians searched for debt-related terms at a rate of nearly 1,170 searches per 100,000 people.

“Australia recorded the third-highest search rates for both ‘borrow money’ and ‘credit card’, with 67.90 and 1,097.10 searches per 100,000 respectively,” the report said.

“However, Australians appear to be a little less comfortable with their debts, as the search rate for ‘debt advice’ in the country is almost twice that of the USA at 1.00 searches per 100,000.”

What types of debt are there?

The main types of personal debts in Australia are as follows. Note that not all debt is 'bad' (borrowing for things that don't improve your finances later, like wage advances or buy now, pay later). Some debt is 'good debt', such as a mortgage or student loan that is taken out to benefit you in the future.

Also known as a mortgage, a home loan is when you borrow a large amount of money from a lender or bank to buy a property and is secured against the house itself. Home loans usually last a long-time, up to 30 years or even longer.

Of the 10 million properties in Australia, 6 million have mortgages against them, and the average new home loan size in June 2022 is over $609,000!

A personal loan is a set sum of money borrowed from a lender or bank, to be repaid over a period of several years at a fixed rate of interest. At Jacaranda Finance, we offer personal loans up to $25,000, with repayments occurring weekly, fortnightly or monthly for up to two years.

A car loan is the same, except the vehicle is secured against the loan, meaning the car can be sold by the lender as compensation if you fail to pay off what you owe. Our car loan is slightly larger than our personal loan, with a maximum limit of $25,000 and a loan term of up to 48 months.

Research shows that the average personal loan size in Australia is around $15,000-$16,000, while the average price of a new car bought with a loan is over $35,000.

A credit card is a limited line of credit issued by a bank or credit provider. The amount of funds on a credit card, aka the credit limit, is set by the borrower during the application process and can be decreased or increased at their (and your) discretion.

Credit cards can have very high interest rates, with an average in 2022 of more than 17.3% p.a. They can also charge an average of $73 in fees each year.

According to Reserve Bank data, the average credit debt being charged interest per Australian (not per card) is just over $2,000!

Did you know: Approximately 68% of Australians say they have at least one credit card, and around 20% have at least two.

Buy now, pay later (BNPL) services such as Afterpay, Zip and Humm allow you to purchase an item and repay it over time, typically over a series of four regular instalments. Most of these services don’t charge interest, but do charge late fees on missed repayments, and limit borrowing power to around $2,000.

According to one source, 25% of BNPL users have outstanding debt, averaging $391.5.

A payday loan is a small amount loan, typically up to $2,000. This loan is designed to be a short-term solution, and while lenders aren’t allowed to charge interest, they quickly rack up exorbitant loan fees. The maximum legal charges, which most payday lenders have, are a 20% establishment fee and a 4% monthly fee.

A 2019 report commissioned by over 20 consumer advocate bodies found that the average payday loan amount was just over $620.

That might not seem like much, but once you factor in those high fees, that $620 would become over $1,022 for a 12-month payday loan. Nearly double!

In Australia, the government may cover your tuition fees with the HECS-HELP loan scheme, depending on your eligibility. The HECS-HELP scheme does not charge interest and is instead indexed according to the Consumer Price Index (CPI), and repayments only begin once a person’s income passes a certain threshold.

ATO statistics show an average outstanding HELP debt of $23,685 in 2021, up more than $400 from the previous year.

Other less common debts include things like:

Unpaid energy & utility bills
Overdrawn account fees
Legal fees & court fines
Child support debts and more.

There’s no shortage of ways to get into debt. Fortunately, there are also options to get out of it. That’s where debt consolidation comes in.

What is debt consolidation?

Debt consolidation, or debt refinancing, involves merging multiple debts, such as personal loans, car loans, and credit cards, into one loan. This one loan will charge one interest rate, one set of fees, and most importantly will have just one ongoing repayment instead of several.

The purpose of consolidating debt is to make managing your repayments easier and to reduce your overall spending by lowering your total interest charges.

Debt consolidation loans still charge interest, just like a regular loan. Like any other loan product, you’re required to repay what you owe on time.

Important: Debt consolidation does not mean debt elimination. Just because your credit card debt ‘disappears’ from your statement once consolidated, you should keep in mind not to overspend and reach your limit again.

How to qualify for a debt consolidation loan

The basic eligibility criteria you must meet before submitting an application:

Be at least 19 years of age.
Be employed on a permanent or casual basis.
Have a consistent income going into your own bank account for the last 90 days.
Be in control of your finances and be handling existing financial commitments comfortably.
Be an Australian citizen or permanent resident with a fixed address.
Have an active email address, phone number, and online banking account in your name that belongs to you.

We accept a wider range of credit history than a bank or a prime lender, but we do not recommend submitting an application if:

You are currently or recently bankrupt (you must be three years discharged and in control of your finances)
You are not comfortably repaying your existing financial obligations

We may ask for information on your existing debts, so come prepared with some recent statements on these.

You should also check your credit report before you apply, as we will check this as a part of our assessment process. You can obtain a free copy of your credit report every three months from one of the major credit reporting bureaus – Equifax, Illion, or Experian.

You don’t need to have a perfect credit score to qualify for a Jacaranda Finance loan, but if your score is too low you might not qualify for some of our best rates. See our article on how to improve your credit score for some practical tips on increasing your creditworthiness.

Alternatively, it can be a good idea to talk to a financial broker or advisor for personalised advice.

Tips for consolidating your debts

Before you apply for a consolidation loan, there are a few things you should look to do first:

Clean up your finances: It can be hard if you’re in debt, but cutting down on discretionary expenses like gambling, BNPL, food delivery, and other ‘nice to haves’ can make a loan application a bit easier.
Avoid multiple applications: Applying for credit multiple times in a short space of time can reflect poorly on your credit report. Take your time finding the right lender for your needs.
Calculate your repayments first: Input your existing debts into a debt consolidation calculator to calculate your potential repayments. If they fit within your budget, then you’re on the right track.
Check the terms and conditions: watch out for any high establishment fees, ongoing fees, transfer fees and more. Read the relevant product disclosure statement (PDS) to see all the fees a lender can charge you.

Importantly, debt consolidation loans can be very useful, but they aren’t a bulletproof strategy. They don’t solve the problem of what got you into debt in the first place. So if you apply for one, it could be beneficial to cancel and cut up any of those high-interest credit cards, stop using wage advances, payday loans and BNPL platforms, and avoid costly impulse purchases - you get the idea.

Debt consolidation loans still require a lot of discipline to pay off what you owe on time, but if you manage it, it might be one of the best financial decisions you can make.

Other practical tips for paying off debts

You can also try some of the following if a debt consolidation loan isn’t for you.

Use your home loan: If you have a mortgage, you may be able to consolidate your debts into that rather than a personal loan. Home loans tend to have lower rates than most forms of debt, but not everyone has one.
Consider a balance transfer: a balance transfer is a type of credit card that lets you transfer other credit card debts to a temporary 0% p.a account. Just know that failing to repay your debts in the balance transfer period (which about 30% of users do) can result in an even higher interest rate!
Pay off your smallest debts first: sometimes called the ‘snowball’ strategy, eliminating your cheapest and smallest debts first can help build momentum towards paying off the larger ones.
Pay off your costliest debts first: the ‘avalanche’ strategy is another method that involves going for the biggest and baddest debts first. With interest rates often over 20% p.a, credit cards can be a major source of debt. So paying those off first can be an important step to becoming debt-free.

Resources for debt help

If you’re struggling with debt and don’t think a debt consolidation loan will work for you, you can call the free National Debt Helpline on 1800 007 007 (Monday - Friday). Aboriginal and Torres Strait Islander peoples can also call the free Mob Strong Debt Helpline on 1800 808 488.

ASIC MoneySmart also recommends doing the following:

check your credit report for free every three months
find free financial counselling services in your state or territory
find free legal advice services in your state or territory
make a repayment plan with your lender

Personal loans for debt consolidation

Jacaranda Finance is a fast and flexible online lender that specialises in delivering reliable, convenient, and simple personal loans for debt consolidation. You can submit an application through our 100% online application process in as little as five minutes¹. Our process is one of the quickest in the business: most applicants will receive a near-instant outcome. The rest should hear back from us on the same day of submitting an application^.2

If you’re considering a debt consolidation loan, apply now using our 100% online application process, or contact one of our friendly staff on 1300 189 823.