What is debt?

Debt is an obligation which involves two parties – the debtor and the creditor. In a debt agreement, the debtor has borrowed either money or an agreed-upon value from the creditor, and is required to repay the debt through deferred payment/s over time. A lender (or creditor) will charge interest and/or other applicable fees while this money is being paid back – meaning the total amount repaid is usually higher than the original borrowed amount.

Debt can take many different forms, and can be acquired through a range of ways. Here are some common forms of debt:

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You may have heard the saying that ‘all debt is bad debt’. If so, we’re here to break it to you that that isn’t always necessarily true. While owing money to another party isn’t always ideal, most people would be hard-pressed going through life without acquiring debt – whether that be buying a house, purchasing a new car, or studying a university degree.

Before wrapping your head around debt consolidation, it’s important to understand the difference between ‘good’ and ‘bad’ debt. This will set the foundation for your outlook on money and debt throughout life, and can help you make smart financial decisions in the future.

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Good debt vs.
bad debt

Understanding the difference between ‘good’ and ‘bad’ debt is the first step in making smarter financial decisions. As Commsec explains, establishing what makes debt ‘good’ versus what makes it ‘bad’ is not linear, and there may be situations where relying on ‘bad debt’ is the sensible financial decision. Learning how to assess situations with a level head can help you make the right decisions when it comes to your finances.

Here you’ll find a definitive explanation of the differences between good and bad debt.

Good debt

Good debt is accrued when money is borrowed to purchase wealth-building assets – assets that grow in value over time, and have the potential to produce income. In some cases, good debt is also tax deductible.

Home loans

For many Australians, taking out a mortgage will be the largest form of debt they’ll incur over their lifetime. Home loans can take decades to repay, and can seem like a huge financial strain. If you’re thinking big picture, however, owning property is typically a great investment – and one that will hopefully increase in value over time. Plus, if you have your sights set on turning a house into an investment property, earning rent from tenants is a way to generate a regular income source.

Student loans

If you’ve studied at an Australian university, there’s a high chance that you have a lump of HELP debt stashed away. Unlike other forms of debt, your student loans won’t incur interest – and will be repaid via automatic deductions from your regular income.

According to Study Assist, the 2021-22 income year compulsory repayment threshold is $47,014; if your annual income falls below this threshold, your automatic repayments will be temporarily suspended.

Student loans are considered to be good debt as they provide people with the potential to generate income. A National Centre for Social and Economic Modelling (NATSEM) report found that, on average, people with a university degree earn $1 million more over the course of their lifetime than those without one. While it depends on your career path, investing in tertiary education has a high probability of paying off in the long run and can therefore considered to be a wealth-building asset.

Bad debt

Bad debt refers to borrowings that won’t enrich your finances later down the track. Whether you’ve borrowed money to fund your lifestyle, or purchase items that will lose their value, non-wealth building assets acquired through financial aid are an example of ‘bad’ debt. You can find out more about bad debt here.

As a rule of thumb, it’s best to avoid purchasing things that you can’t afford then and there. While it’s tempting to rely on personal finance to get your hands on items as fast as possible, it can be much more financially sound to be patient and save.

As a rule of thumb, it’s best to avoid purchasing things that you can’t afford then and there. While it’s tempting to rely on personal finance to get your hands on items as fast as possible, it can be much more financially sound to be patient and save.

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Car loans

Owning a car is a factor of life for most Australians. Whether you’re buying brand new or second-hand, you’re most likely going to be forking out a hefty sum of cash to get your hands on a vehicle. For the vast majority of models, cars will decrease in value from the second you drive off in it – which is why car loans are considered a ‘bad’ debt.

If owning a car is a non-negotiable, consider purchasing a second-hand, reliable model that will get you from A to B just as well as that flashy SUV you’ve been eyeing off. While being the envy of other road drivers can be exhilarating, it can often be more practical to rely on savings to purchase a car instead of taking out a car loan (if it’s avoidable).


Consumer debt

In today’s society, consumer debt is a massive source of bad debt for millions of Australians. With social media’s portrayal of the ‘perfect lifestyle’, it’s easy to get caught up in the latest trends and max out your credit card while doing so. Consumer debt refers to debt that’s incurred on items or experiences that you can’t actually afford (like luxury goods and holidays), and it’s becoming more popular by the day.

The most popular forms of consumer debt are through credit cards and buy now pay later services like AfterPay and Zip Pay. If you’re able to manage your spending and repay what’s owed to avoid interest charges or late fees, these services can be used sensibly. However, overspending is easily done, and pretty quickly you’ll be falling into debt while the materialistic items you’ve been splurging on have lost their value.

Another popular form of consumer debt are payday loans. These short-term lending options incur relatively high fees to make up for their inability to charge interest. If not used responsibly, borrowers can quickly find themselves in a tough spot when juggling multiple repayments.

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What is debt consolidation?

Debt consolidation, or otherwise known as refinancing, is where you merge multiple debts including personal loans, car loans, and credit cards, into one loan. The purpose of consolidating debt is to make managing your repayments easier, and to reduce your overall spending by lowering your total interest charges.


In today’s society, applying for credit has become a normality for many. You may be purchasing a new car, funding an overseas trip, or splurging on a new designer bag – and, with funding options available at the click of a button, it’s not hard to get bogged down with consumer debt. Even if you’ve maxed-out your credit card on medical bills and essential spending – you’re still facing high-interest debt that can follow you around like a bad smell.

Instead of juggling multiple debts and trying to keep on top of repayment due dates, combining all of your debts is a simple way of handling your money. By reorganising your debt, you can usually pay it off faster too.

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

Am I eligible for debt

Before applying for a consolidation loan, you should check your eligibility. The fastest way to see if you’re on the right track is by checking your credit history, and understanding your credit score. You can obtain a free copy of your credit report once a year from one of the major credit reporting bureaus – Equifax, Illion, or Experian.

Once you’ve figured out where you stand with your credit, you can start considering whether consolidation is the right option for you. The common reason people apply for debt consolidation is to achieve a lower-rate loan – so, if your credit score is below average, you may have a difficult time achieving this. If you’re unsure of your options, it can be a good idea to talk to a financial broker or advisor to give you personalised advice.

Important Note
Applying for credit multiple times in a short space of time can reflect poorly on your credit report. In the eyes of lenders, it can demonstrate financial hardship. If you’re unsure whether or not to apply for debt consolidation, make sure to reach out to a professional to discuss your options before submitting any applications.

Debt consolidation:
pros vs. cons

Like most financial decisions, choosing to consolidate your debt comes with many considerations. Hundreds of traditional and online lenders offer consolidation loans at the click of a button. However, it’s important to do your research and understand the pros and cons of this type of financing before signing any contracts.


Might help alleviate financial struggle for
borrowers with several high-interest loans;

Consolidating debt doesn’t always solve or
alleviate financial problems;


Offers organisation through
streamlined finances;

Possibility of up-front costs, including balance
transfer fees, annual fees, etc.


Potential for improving credit, by lowering the risk
of missing multiple repayment dates;

Potential for higher-interest charges than on your
current debt, due to your credit score;


Potential for paying less overall
through a lower-interest rate;

Can encourage increased
discretionary spending;


Potential to be repaid over a shorter period
of time, due to consideration of income,
credit score, and amount owed.

If repayments are missed, you can be set back
even further and subjected to late payment
fees while damaging your credit score.

What to consider before
consolidating your debt

Tossing and turning about whether debt consolidation is the right path for you? Aside from the pros and cons listed above, you should consider why you’ve got multiple debts to start with. Addressing the underlying problems that led to your debt is important, as without it you’re likely to fall back into a pattern of overspending.

If you’re searching for more information about what to consider before consolidating your debt, you can find useful info on the Australian Government’s Moneysmart site.

When is the right time
to consolidate?

Even though you may be eligible for a consolidation loan, that doesn’t necessarily mean you should take it. Understanding when the right time to apply is important in ensuring that your finances don’t take a hit.Before applying for a debt consolidation loan, ask yourself the following:

Is consolidating my debts the best option? If you’re not careful, consolidating your debts could work out to be significantly more expensive than paying them off one by one, especially if you have a below-average credit score. Before applying for a debt consolidation loan, take a look at the debts you intend to consolidate, get an idea of the total cost and compare it to the consolidation loan that you’re thinking of applying for.

Is my credit score high enough? Applying for a debt consolidation loan is typically done to secure a lower interest rate. If your current credit score is poor, you might find that lenders will only offer you a high interest rate on a consolidation loan – which can be disadvantageous for your finances. Does my cash flow cover my debts? If you’re unable to make repayments on your debts due to not earning enough or having an inconsistent income, consolidating these loans won’t solve your problem. If you’re stuck, speaking to a financial advisor and seeking professional advice may be the best option.

Finding the right consolidation
loan for you

There are plenty of consolidation options available – but how can you know which is right for you? Keep these tidbits in mind when searching for a consolidation loan, to ensure you don’t go down the wrong path.

1. Ensure repayments will be less

Consolidating your debts should provide you with more financial flexibility. The purpose of these loans is to make repayments easier, and ideally lessen your overall interest charges on repayments. Before selecting a consolidation loan, ensure that you compare the offered interest rate (along with any other fees) against your current loans. If it’s looking like you’ll be repaying a significantly higher amount in total, it’s probably not in your best interest to apply.

While a lender may offer a competitive rate on a consolidation loan, you should check for early repayment charges and other fees that may pop up over your loan term. This includes loans which offer lower interest rates but longer terms. While you aren’t paying as much each time, in the long run you may pay more than a shorter loan with higher rates.

2. Do your background research

Applying for a consolidation loan is a form of personal finance – and it’s important to treat it that way. Before signing any contracts, you should be wary of companies who do the following:

  • Request you to sign a blank document;
  • Refuse to put the full loan costs, rates, and fees in writing before requesting you to sign a loan contract;
  • Have no record of licensing on their website;
  • Rush you through the application and approval process.

Always check that the lender you apply with lists itself as a member of the Australian Financial Complaints Authority (AFCA) on their website. Being a member of this board means that customers have the ability to make a complaint and receive free dispute resolution that’s independent of your lending company.

3. Secured consolidation loans

Depending on the amount you apply for, some lenders may request that you attach a security against the loan. Secured loans use an asset like a car, boat, or home as security, which the lender can repossess if you’re unable to pay back the loan. Typically, secured loans can offer more competitive interest rates than unsecured loans, though this can change from lender to lender.

Non-consolidation options
to handle debt

Debt consolidation may not be the answer for everyone. Thankfully, there are other options available to manage debt – no matter how far along in your journey you are.

Speak with your current creditors

Before choosing to consolidate your debts, speak with the lenders who you currently owe money to and see whether they can alter your repayment schedule. They may offer to hold your scheduled payments while you get back on your feet, or figure out a more manageable repayment plan.

Seek professional help

In Australia, we’re lucky to have a range of sources to help us when we’re struggling financially. Consulting a financial counsellor may help you to negotiate your debt with your current providers, and find an alternate route to paying off your debt. You can also obtain free legal advice from community legal centres and Legal Aid offices around the country. Another useful contact is the National Debt Helpline for free financial counselling services.

Final note

If you’ve made it this far and are considering debt consolidation for your finances, Jacaranda Finance may be the right place for you. We offer consolidation loans from $3,000 to $25,000 nationwide, and specialise in bad credit loans for Aussies.

We don’t charge early repayment or exit fees on any of our consolidation loans, and our team of experienced loan specialists are always open to discuss your options with you. If you’d like to find out more about how Jacaranda Finance can help, reach out to our customer service team today.