In Australia’s increasingly challenging rate environment, borrowers are grappling with heightened financial strain. Rising interest rates have amplified mortgage repayments, squeezing household budgets already stretched thin by soaring living costs. Many find themselves caught between prioritising essential expenses and meeting loan obligations, leading to increased stress and financial vulnerability.
Since the beginning of this rate-hiking cycle (which started in May 2022), most Australian mortgagors have experienced a 30–60 per cent spike in the minimum scheduled repayments, according to the Reserve Bank of Australia’s (RBA) March 2024 Financial Stability Review. And, with the central bank (and increasing number of economists) expecting that the easing cycle may not come until next year, many more borrowers may be subject to acute financial pressure.
To help ease the pain, more borrowers are turning to personal loans (see page 24 for more) to help them purchase the things they need and want.
And research from digital loan matching platform Lendela suggests many Australians are also turning to high-cost credit options such as buy now, pay later (BNPL) and salary advances to make ends meet. While these forms of credit can be used to help customers through a tricky patch, they also come with the added risk of steep interest rates and fees and can lead to a situation where monthly commitments outpace incoming funds, putting individuals in unsustainable debt cycles
But if borrowers are taking out multiple loans or BNPL facilities, they may be doing longer term damage to their credit scores, impacting their future borrowing capacity. Debt consolidation, on the other hand, can provide borrowers with a more measured approach.
Many lenders, from major banks such as NAB to non-bank lenders like Pepper Money, offer borrowers the option to combine multiple debts into one repayment.
This debt consolidation can take the form of a new loan that combines several debts in one payment or a facility where debts are rolled into a single mortgage through home loan refinancing. This not only helps streamline a borrower’s debt repayment schedules, but – in many cases – means they can pay off their debt sooner and can work out cheaper, too (particularly if there are unencumbered assets that can be used as security).
For example, if a client is paying off two credit cards with an interest rate over 20 per cent at two different lenders and a car loan of 8 per cent with another lender, they may be better off rolling these debts into one personal loan to access lower rates (typically between 8 and 20 per cent) through one single lender.
It’s perhaps unsurprising then that the number of applications for debt consolidation loans has spiked recently, with Lendela having recently reported a 170 per cent increase and with the average loan size sitting at $33,000.
But ensuring borrowers are aware of the true cost of consolidating debt is critical. Brokers are well placed to help borrowers understand whether consolidating their debts may help them conquer their debts, particularly when it comes to showcasing the cost of weekly/fornightly/monthly repayments and the accrued interest over the life cycle of the loan. And, for many home buyers, having one repayment to worry about rather than several may also help improve their credit score (and borrowing capacity) before lodging a home loan application.
