Debt consolidation: when it saves money and when it costs more

Debt consolidation means combining several debts, such as credit cards, personal loans and car finance, into one loan with one repayment. Done well, it lowers your interest rate and gives you a clear payoff date. Done poorly, it can cost you more.

When it usually saves money

• You're paying high credit card or personal loan rates and can move to a much lower rate.
• You keep paying roughly what you were paying before, so the debt clears faster.
• You close the paid-off cards so the balances don't build up again.

When it can cost more

The trap is the loan term. If a credit card balance you'd have cleared in three years is spread over a 30-year home loan, the monthly repayment falls, but you can pay interest on it for decades. A lower rate doesn't guarantee a lower total cost.

Other things to check

• Fees: early repayment fees on the debts you pay out, plus any setup costs on the new loan.
• Borrowing power: open credit card limits count against you even at a $0 balance, so close the cards you no longer need.
• Equity: consolidating into a home loan needs enough equity, and going above 80% of the property's value can trigger lenders mortgage insurance.
• Secured versus unsecured: once debt is part of your mortgage, it's secured against your home.

If repayments are already a struggle

If you're behind or worried about falling behind, contact your lenders about hardship options, or call the free and confidential National Debt Helpline on 1800 007 007 before taking on a new loan.