Debt consolidation is often pitched as a simple way to manage multiple debts. For borrowers, however, the picture is more complicated. Consolidation doesn’t automatically save money—it depends on interest rates, fees, loan terms, and how you manage repayments.
Working with a home loan broker can help you understand whether consolidation will actually reduce costs or just restructure your debt.
When Debt Consolidation Could Save Money
Debt consolidation may be beneficial in certain situations:
Simplified Repayments
Managing multiple repayments can lead to missed payments or late fees, which hurt your credit. Consolidation reduces this risk, making repayments more manageable and less stressful.
Lower Overall Interest on High-Cost Debt
Credit cards and short-term personal loans often carry high interest. Consolidating these into a single loan with a fixed rate may reduce total interest, even if the rate is higher than standard loans.
Predictable Repayment Schedule
A fixed repayment plan helps you budget and prevent debt from spiralling. Consistent repayments can signal to future lenders that your financial behaviour has stabilised.
When Consolidation Might Not Work
Debt consolidation is not a one-size-fits-all solution, especially for borrowers with bad credit:
- Interest Rate Premiums: Rates may still be higher than average, limiting savings.
- Longer Loan Terms: Extending repayment length may ease monthly cash flow but increase total interest.
- Behavioural Risk: Treating consolidation as a “reset” may lead to accumulating new debt.
Before consolidating, consider the total cost of the loan, not just monthly repayments.
How to Maximise the Benefits of Debt Consolidation
For those with bad credit:
- Compare Total Costs, Not Just Payments: Focus on the overall interest and fees over the life of the loan.
- Target High-Cost Debt First: Consolidate debts with the highest interest rates.
- Choose Secured vs Unsecured Wisely: Secured loans may have lower rates but risk assets; unsecured loans protect assets but usually cost more.
- Maintain Repayment Discipline: Missed payments on a consolidated loan can impact your credit more than smaller defaults across multiple debts.
So Plan Carefully, Don’t Assume Savings
Debt consolidation can reduce stress, simplify repayments, and in some cases, save money. However, for borrowers with bad credit, success depends on:
- The interest rate relative to existing debts
- Loan fees and repayment term
- Your post-consolidation repayment behaviour
- How the lender interprets your bad credit risk
With careful planning, accurate cost comparison, and repayment discipline, consolidation can be an effective financial tool.