What is Debt Consolidation And How to Consolidate Your Debt?

A credit card here, a store card there, perhaps a personal loan as well – it’s easy to build up a reasonable amount of personal debt quite quickly and perhaps without really intending to. So what are your debt consolidation options?

What is debt consolidation?

Consolidating your debt means combining all your small debts into one large debt, and setting up a regular repayment plan to get it all paid off in a reasonable timeframe. Debt consolidation can be a good way to help you to repay your debts more easily and more quickly and to feel in better control of your money.

Two common ways to consolidate your debt are either via a personal loan or via a credit card balance transfer.

Personal loan debt consolidation

A personal loan is a loan taken out with a financial institution for a defined amount and a defined timeframe (the loan term), e.g. a $10,000 loan taken out over 5 years. You make monthly repayments on a personal loan and it is designed to be paid off completely at the end of the loan term.

Currently on Canstar’s database, personal loan interest rates range from a low of 4.53% to a high of 19.49% for secured personal loans, and a minimum of 6.28% to a maximum of 22.99% for unsecured personal loans. (See our 2016 Star Ratings Report for more information.)

Personal loan application form

With fixed terms of somewhere between 2 to 7 years, borrowers are forced to repay the loan within the stipulated time period. This can be advantageous to those who lack the discipline needed to repay their debts on time, especially those with a credit card debt, where only repaying the minimum each month will see the debt last for decades and incur massive interest charges.

Be careful to check any application fees and ongoing fees on any personal loan you are considering.

Compare Personal Loans

Credit card debt consolidation

Generally, the credit card debt consolidation method involves using a credit card balance transfer. Balance transfers involve rolling your credit card debts onto a credit card with a low interest rate or a 0% interest rate that lasts for a certain timeframe, usually the first 6-12 months. So you can consolidate multiple outstanding amounts on credit cards that are charging you a high interest rate by transferring the balance of each card onto one credit card.

Currently on Canstar’s database there are 120 credit cards offering a 0% balance transfer. Here are some of the lowest rates and longest terms we saw on balance transfers in 2016.

Pile of credit cards

Consolidating multiple credit cards onto one credit card balance transfer is one option to make repaying your debts easier.

But remember, with a credit card balance transfer, you only have to make the minimum repayments, with no requirement to pay the debt down to zero within any certain timeframe. So it’s easy to let your debt slide under the radar and grow over time.

There are other potential traps with balance transfer deals. Once the balance transfer promotional period is over, the interest rate charged on the credit card may revert to quite a high rate – in fact, some of the highest rates on our database. So if you haven’t paid the balance off in the specified timeframe, this can eat into any debt consolidation you’ve achieved up to that point.

Compare Balance Transfer Deals

Debt consolidation example calculations

The tables below examine the difference between repaying a loan of $10,000 over 3 years using a 10% personal loan and a 12% low rate credit card with a balance transfer period of 6 months at an introductory rate of 0%.

Personal Loan vs Credit Card: Total repaid in 3 years*
At the end of the 3rd year
Interest Rate p.a.  Monthly
Total Interest
3 years 10.00% $322.70 $1,616.19 $0
Card **
3 years 12.00% $322.90 $1,353.69 $0
* calculations based on $10,000 over 3 years
** calculations include 0% balance transfer for 6 months

By looking at the total interest paid, the consumer would be better off by an estimated $265 taking out the credit card with its 6 months balance transfer offer of 0% instead of the personal loan.

That, however, assumes that the borrower is disciplined enough to get all the debt paid off in a 3 year period. But – what if the borrower pays only the minimum required on their credit card debt?

As this second table clearly shows, if the consumer fails to repay the fixed monthly repayments of $323 on the credit card and elects instead to pay only the minimum, he or she will take more than 17 years to repay the debt in full.

Personal Loan vs Credit Card: Minimum Repayment*
  At the end of the 3rd year  
Total Interest
3 years 10.00% $322.70 $1,616.19 $0 3 years
12.00% 3% or $10 $1,893.00 $4,543.73 17 years &
3 months
* calculations based on $10,000 over 3 years
** calculations include 0% balance transfer for 6 months


Debt ConsolidationHome loan debt consolidation

If you have an existing home loan, you could instead transfer your debt onto your mortgage, typically at a considerably lower interest rate than other debt consolidation options.

However, there is a danger here that, despite minimising your monthly repayments, you might end up paying off the debt over a much longer term, costing you more in the long run.  Fortunately, this can be avoided by paying more than the minimum each month.

Repayment plan debt consolidation

Despite all these options, it might make more sense to talk to your credit providers instead. Rather than consolidating, it can be more effective to leave your debts where they are and talk to each of your credit providers about a repayment plan or repayment strategy.

Credit providers don’t want you to default – that just loses them money. So providers will usually work with you to develop a repayment plan, which, depending on your personal circumstances, might be the most effective option. You can use our Budget Planner Calculator to work out an estimate of what you could afford to repay towards your debts each month, taking into account the need to pay your rent or mortgage and buy groceries and fuel:

Budget Planner Calculator

If you find that your lender won’t agree to an affordable repayment plan, you can make a formal complaint to the Financial Ombudsman Service or the Credit Ombudsman, who can help you to resolve the issue with your lender.

Which debt consolidation strategy should you choose?

Apart from cost considerations, individuals should strongly consider their own spending habits and their ability to repay their debts on time. If you are prone to overspending or not paying on time, you may be better off with a personal loan, as it forces you to make regular repayments.

Personal Loans Repayment Calculator

The loan term or borrowing period is another important consideration. It if takes you a long time to repay your debt, you might end up paying more interest on your credit card than a personal loan. This is very much brought home when the interest-free period ends and your credit card reverts to charging a higher interest rate.

Weigh up your options carefully, and make sure you have a good repayment strategy in place.

Finally, it is important to remember to cancel the cards and loans that you have consolidated so that you’re not tempted to use them again and wind up in an even worse situation!

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