When should you consolidate your debt?

Debt consolidation – the process of taking out a loan in order to pay off all other smaller debts – can be an effective solution for Australians struggling to keep up with their financial obligations.

However, no two people are the same, so it can be difficult to determine whether debt consolidation is the right choice for you.

When is debt consolidation the right choice?

Whether you're a first-time home buyer with a credit card bill a kilometre long or a retiring business owner looking to settle some loans from the past, debt consolidation is most effective when the interest rate you receive on your new loan is lower than that on the debts you're paying off.

If you take out a loan to pay off other loans, it won't make much sense if the new loan ends up costing you more money thanks to a higher interest rate.

Another factor to consider is how many outstanding debts you currently have. One of the greatest benefits of debt consolidation is doing away with the stress that comes from many debts and being able to focus on only one obligation that needs to be repaid.

If you have multiple debts and it's difficult to keep track of what needs to be paid and when, debt consolidation might be the best solution.

Of course, debt consolidation isn't a magical cure-all. It comes with its own challenges.

For instance, taking out a new loan to pay off other ones means that it could take longer to pay off all your debt since you're working with a single amount, that, based on the term length and interest rate, might require a longer repayment time.

It can help to weigh these pros and cons with financial specialists who understand the intricacies of debt consolidation.