Put simply, debt consolidation is the process of replacing several separate loans (or debts), with one new loan (or debt). For example, you may have an existing home loan, a car loan and also some credit card debt. A new loan (secured against your home) is taken out which effectively pays out these three debts and then continues to operate as a normal home loan.

But, is debt consolidation the right answer for you? The ability to combine a number of debts into one “neat package”, is attractive. However, before proceeding, you should seek expert advice from your financial planner to ensure that this really is the best option for you. There are several interesting consequences of using a single new (and larger) loan to replace a portfolio of existing personal debt, which can be both potentially advantageous or disadvantageous to you, depending on your individual circumstances:

The potential advantages of debt consolidation include:

• the annual interest paid on the new loan is usually less than the total annual interest paid on types of debt you may have. For example, credit card and personal loan interest rates are normally higher than those on housing loans;
• annual repayments on the new loan will often be considerably less than the total repayments made on all your current debts;
• the ongoing transaction costs associated with the one consolidated loan may be significantly less than the total costs currently incurred on the five existing facilities; and
• ease of management - just one monthly statement and one monthly payment.

• a loan which might otherwise be repaid over a shorter term (for example, personal loans are normally repaid over a one to five year period), will now be all repaid over the longer term of the new loan;
• the longer term of the new loan means total repayments made will be considerably greater than the sum of the total repayments of current multiple debts (unless some early repayments of principal are made); and
• there may be costs associated with the taking out of the new loan and the early repayment of the other facilities.