Pros and cons of debt consolidation

Tired of the debt juggling act? Debt consolidation might be for you. Before you dive into simplifying your debt, take 5 to consider the pros and cons of debt consolidation.

What's in this guide?

Q1: What are the benefits of debt consolidation? 

Let’s start with the good stuff as there’s SO many perks to consolidating your debt. 

A few of the pros are: 

  • Repayments made simple: By consolidating multiple debts into one loan, you’ll have an easier time keeping track of your repayments. Think one monthly repayment, one interest rate, one loan … sounds nice doesn’t it? 

  • Less interest: Debt consolidation loans may have lower interest rates than credit cards or other unsecured forms of debt, which can help you to save money long-term. 

  • Improve your credit scores: If you’re looking to boost your credit scores over time making on-time payments to a debt consolidation loan can be a way to do it. Want to see where you stand now? Check your credit scores with Wisr

  • Debt-free faster: If your debt consolidation loan is accruing less interest than your old debt, it’s easier to pay off in a shorter period. 

  • Smaller repayments: If you have a longer loan term, your monthly repayments may be lower than what you were paying on your old debt.

Q2: What are the downsides to debt consolidation?

We don’t mean to be a bummer, but it’s important to see the full picture when considering a debt consolidation loan. 

Some of the cons are: 

  • A longer loan term: Wisr’s loan terms are 3, 5 and 7 years. Opting for a longer loan term on your debt consolidation may mean your monthly repayments are lower, however, it might take you longer to pay off and you may end up paying more in interest.

  • It’s not a quick fix: While we wish debt consolidation was the answer to all our money problems, the reality is it’s not that simple. While it will simplify your debt and make it easier to get on top of, it’s important to also address any underlying issues that led to your debt. This could be overspending, lack of budgeting, gambling, impulse shopping or something else.

  • Secured v unsecured: If your debt consolidation is secured by assets e.g home and car and you find yourself unable to make your repayments, you may risk losing them. Read up on secured loans here. 

  • Excludes some debt types: Not all debt is made equal and some types of debt such as tax debts, student loans and some secured loans - may not be eligible for debt consolidation. Ask your lender specifically what debt they are willing to include in your loan. 

  • It may affect your credit scores: If you miss a repayment on your debt consolidation your credit scores can take a hit. Applying for a debt consolidation loan may impact your scores initially, but over time they are likely to improve if you keep up to date with your repayments and avoid late fees. 

Q3: Is debt consolidation right for me?

We’ve only just met so that’s a difficult one to answer. The best way to know if debt consolidation is right for you is to do your research. If you’re still having trouble answering this, you could get a rate estimate, or speak to a financial advisor or credit counsellor to determine if it’s the right choice for you. They can help you weigh up the above pros and cons and create a plan to help you achieve debt freedom.

Q4: Will debt consolidation hurt my credit scores?

A debt consolidation loan requires a hard enquiry on your credit so yes, it might affect your credit scores initially.

Making your repayments on time and paying off your debts are good financial habits that can improve your credit scores over time

Q5: Is there anything else I should know?

We could go on, and on, about debt consolidation for yonks, but we’ll spare you the itty bitty details. 

Before you go, here are a couple more things to consider when applying for this type of loan. 

  • Have you shopped around for the best deal? Compare interest rates and fees from different lenders before choosing a debt consolidation loan, you can get a rate estimate from Wisr here. It's also important to read the fine print and understand the terms and conditions of the loan before signing the digital line. 

  • What’s the total cost of your loan? While consolidating your debt may lower your monthly payments and interest rate, it may also increase the total amount you pay long-term due to the longer loan term.

  • Is it secured?: If possible, avoid consolidating your debt with a secured loan that uses your home as collateral, as you could risk losing your home if you are unable to make payments.

  • Are your documents ready? Lenders will typically run a credit check before approving a debt consolidation loan, so be prepared to provide information about your income, debts, and credit history. Australians will also need proof of identity documents such as a passport, driver's licence and Medicare card. 

  • What’s causing your debt: It's important to address the underlying issues that led to your debt, such as overspending or a lack of budgeting, to avoid accumulating more debt in the future.

  • Have you spoken with a financial advisor? If you’re unsure if debt consolidation is right for you, speak with a financial advisor or credit counsellor to help you to answer this.

  • How will you pay it off? Consolidating your debt will not make it disappear, it only moves it around. It's also important to have a plan to pay off your debt and make changes to your spending habits to avoid getting into debt again.

    Ready to take the plunge into debt consolidation? Get started with a free rate estimate.

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Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Services does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.

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