The pros and cons of consolidating your debts

Couple using calculator and thinking about debt consolidation

Looking to combine your debts into one manageable monthly payment? Debt consolidation with a personal loan could help. But there’s some important information that you should consider before applying.

What is debt consolidation?

If you’re having difficulty juggling payments on multiple loans or credit cards? Then you may want to consider consolidating these debts into one easy-to-manage loan with a single monthly payment – this is known as debt consolidation. Here are some pros and cons to help you make an informed decision when choosing whether to consolidate your debt or not.

The pros

Paying once, instead of multiple times a month

Taking out a personal loan to pay down your credit cards as well as any interest you owe means you'll only have one repayment to make every week, fortnight or month, over a fixed amount of time. Managing your debt thus becomes easier.

Obtaining fixed rates and terms

A fixed rate and term in a personal loan can keep you disciplined in paying off debt quicker. But it’s important not to commit to a payment schedule that you can’t meet, or you’ll risk hurting your credit score. 

Lowering your monthly payments

Stretching the term on your personal loan means that you could be spending less towards paying off your monthly repayment amount, but you will end up paying more overall. So consider this before extending your loan.

The cons

Spending more overall

Consolidating your debt means that you’ll free up credit. But while a personal loan with a longer term can help you reduce your monthly repayments, the longer loan term loan means that you’ll pay more interest and spend more overall.

You could damange your credit score

If you don’t keep up with the monthly repayments on your personal loan, you could end up hurting your credit score or even find yourself in financial hardship.

What to do before applying for a personal loan to consolidate your debt?

  • Shop around – find a loan that offers an interest rate and terms and conditions that work for you.
  • Understand your finances - take the time to calculate comfortable repayment terms and schedules that works for you, so you don’t risk paying late fees and further interest.
  • Know your credit rating and serviceability - this will be useful when applying for a personal loan.
  • Be proactive and take control of your debt - if you feel your debts getting out of hand, then take measures to ensure you can meet your financial obligations. This will save you money and help you stay in a good position to take on other loans in future, such as a home loan.

Important questions to ask before consolidating your debt

Does consolidating your debt ruin your credit?

While consolidating debt does not 'ruin' your credit, if you’re taking out a new credit facility, your chosen lender will likely undertake a credit check, which will be recorded on your credit file. If you have recently applied for multiple lines of credit, then these all do add up on your credit file and may result in your score being lowered.

Can I consolidate debts with bad credit?

You can still consolidate debts if you have a lower-than-average credit score, however lenders may apply a higher interest rate based on your credit score and historical ability to meet your repayments.

Looking to consolidate your debts? We’re here to help

To get you started, find out how much your repayments might be on a Pepper Money personal loan using this handy calculator, or get your individual rate before applying in just a few minutes (it won't affect your credit score).

Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.

All applications for credit are subject to credit assessment, eligibility criteria and lending limits. Terms, conditions, fees and charges apply. 

Pepper Money Personal Loans is a brand of Pepper Money Limited. Credit is provided by Now Finance Group Pty Ltd, Australian Credit Licence Number 425142 as agent for NF Finco 2 Pty Limited ACN 164 213 030. Personal information for Pepper Money Personal Loans is collected, used and disclosed in accordance with Pepper’s Privacy Policy & the credit provider’s Privacy Policy.

Pepper Money Limited ABN 55 094 317 665; AFSL 286655; Australian Credit Licence 286655 (“Pepper”). All rights reserved. Pepper is the servicer of home loans provided by Pepper Finance Corporation Limited ABN 51 094 317 647. Pepper Asset Finance Pty Limited ACN 165 183 317 Australian Credit Licence 458899 is the credit provider for asset finance loans.

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