The upsides and downsides of home loan debt consolidation

female happy with refinancing debt consolidation

A lot of small debts can balloon into one big headache. A simple way to get things under control could be to refinance your home loan to consolidate debt. So – is it right for you?

What is debt consolidation?

Debt consolidation

Simply put, debt consolidation is combining all your debts – credit cards, car loans etc. – into one single debt with a single monthly payment. When they are individual loans each of them have their own specific interest rates, conditions, and balances – so rolling them all into one loan is both efficient and easy to manage.  You can consolidate all your small debts into your home loan.

If you feel like you are drowning in credit card debts, debt consolidation may be an appropriate option for you. You may need to refinance your current home loan. Depending on how much equity you have in your home, you may find it possible to refinance your credit cards, store cards or personal loans into your home loan. This would provide you with one monthly manageable payment at an interest rate much lower compared to the average credit card rate of 19.94%.

But before you head down the debt consolidation route, here are some of the upsides and downsides to help you make a well-informed decision.

The upsides…

1. Instead of several times a month, pay once. Managing your debt becomes a lot easier when you pay down all your credit cards – as well as any interest you owe – with one repayment every week, fortnight or month over a fixed amount of time.

2. One fixed rate and term.

  • Consolidating your debt into one personal loan gives you certainty over payment amounts and keeps you disciplined in paying down your debts.
  • Consolidating your debts into your home loan allows you to borrow at the lowest interest rate and you pay less in repayments.

3. Less to pay each month. By consolidating your debt, you pay less fees and helps reduce the amount you pay in interest charges.

The downsides…

There are always pros and cons to any loan decision. Here are some of the cons of using a home loan for debt consolidation:

1. You could accumulate more debt. When you consolidate debt, you free up credit. This might make you think you can spend more and, as a result, you end up with even more debt than you had before

2. Pay more overall. A loan with a longer term can help you reduce your monthly repayments but a longer term means more interest overall

3. Your credit score could take a hit. In the event you don’t keep up with the single monthly repayments on your loan, you could end up hurting your credit score or be in serious financial hardship.

Paying credit card debts

Debt consolidation can be an effective tool for simplifying your finances and managing your debt. By combining multiple debts into one single loan, you can reduce the number of repayments and potentially lower the amount you pay in fees and interest charges. However, it’s important to weigh the upsides and downsides before making a decision. While it can provide certainty and discipline, it may also lead to more debt and higher interest charges in the long run.

Remember, speak with us first as your finance specialists before making decisions and acting without knowing and understanding your range of options. We understand debt consolidation and how it can work for you. Don’t hesitate to reach out to us at Maverick Finance.

Maria Papa is a senior property and finance expert specialising in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans, and loan protection.  She has offices in Sydney, Melbourne, and Manila.  If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au.

Your full financial situation will need to be reviewed prior to acceptance of any offer or product.

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