debt misconceptions

Misconceptions about debt consolidation explained

Rates and Fees verified correct on December 11th, 2016

Reducing what you pay each month while still paying off your debt sounds like a no-brainer, but do you really understand what it means to consolidate your debts?

If you’re repaying multiple debts, whether it be personal loans, credit cards or line of credit accounts, you may be considering a debt consolidation loan. At finder.com.au, we receive a lot of questions about debt consolidation and there are several misconceptions surrounding it. This guide will clear up a few of them.

A debt agreement is not bankruptcy

Debt agreements are considered to be an act of bankruptcy. As such, you need to think carefully before entering into a Part 9 Debt Agreement. If you want tp dive deeper into the differences, have a look below:

Differences between Part 9 Debt Agreements and bankruptcy

Part 9 Debt AgreementsBankruptcy
How long it lastsThe agreement ends once you pay back your debtsBetween three and eight years
Effect on your creditIt will appear on your report for five yearsIt will appear on your credit report for two years from the date you were discharged or five years from the date you became bankrupt, whenever is later.
National Personal Insolvency Index (NPII)Your name will appear on the NPII for a limited period of time.Your name will appear on the NPII forever.
Your eligibilityThere are income, asset and debt thresholds and you cannot have been bankrupt or in a debt agreement in the last 10 years.You may not be accepted if you were previously bankrupt but there are no income, asset or debt thresholds.
Your employmentThere are no restrictions.Certain industry associations or licencing authorities may have restrictions or conditions concerning bankruptcy.
Your incomeThere are no restrictions.Your may be restricted to pay your creditors.
Other restrictionsYou may be required to disclose your debt agreement if you own a business in another name.There are many restrictions, for instance, you cannot travel overseas without prior written consent of your trustee.

You can’t balance transfer a personal loan to a credit card

Balance transfer credit cards are usually reserved for transferring debt between card accounts, but there are a few lenders that allow you to balance transfer debt from additional sources. This includes personal loans and lines of credit. If you’re looking for an interest-free way to pay down your debt for up to 18 months, you can compare your options on this page.

You can’t get into further debt while under a debt agreement

While debt agreements are an act of bankruptcy and are listed on your credit file, it’s not impossible for you to access credit while under a Part 9. Therefore, it’s possible to get further into debt while you’re still repaying your creditors.

It’s important to budget while under a debt agreement and not apply for credit you cannot afford. If you do find yourself unable to manage repayments to your creditors, you have the option of lodging a proposal to vary or terminate the agreement. However, if you’re not keeping up with payments, your creditors can seek to make you bankrupt.

Debt consolidation will get you out of debt

Debt consolidation can be a great way to reduce what you’re paying in interest and fees and make it easier to manage your repayments. However, this does not always mean the end of debt.

Not closing your credit accounts after applying for a consolidation loan can lead to unnecessary fees and charges. Your circumstances may change while repaying your debt consolidation loan, necessitating the need for further credit. You may also want to take on “good debt” to invest in an asset such as property.

Whatever the case, it’s important to consider the circumstances surrounding your debt consolidation loan and what might eventuate while you’re repaying it.

All debt consolidation loans are the same

There are several different types of debt consolidation loans and credit accounts that are available. Some loans are marketed as “debt consolidation loans” while others are simply suitable for this purpose. Here are the main types:

  • Debt consolidation loan. These loans are specifically designed to help you consolidate existing debts. Lenders may be able to pay out your current credit accounts on your behalf using information provided in your application. The amount you’re approved for may depend on the level of debt you have.
  • Unsecured personal loan. You also have the option of applying for an unsecured personal loan to pay out your outstanding debt on your own. However, there’s no way of ensuring you’ll be approved for the entire amount you need to repay all of your debt.
  • Part 9 Debt Agreement. If your debt has become unmanageable, you can consider entering into a debt agreement. This is an official agreement that must be agreed to by every one of your creditors and should only be considered as a last resort.
  • Debt consolidation home loan. If you own property and have outstanding personal loans or credit card debt, you can consider refinancing your home loan to consolidate your debt.
  • Balance transfer credit card. Balance transfer credit cards give you a way to consolidate debt from separate card accounts and pay it back over an interest-free period. At the time of writing, these periods can last as long as 20 months.

Debt consolidation is always cheaper

While a new debt consolidation loan can help reorganise your debt into one easy-to-manage repayment, it’s important to calculate how much it will cost you to close your accounts and consolidate to find out if it’s worth it. It’s a common misconception that debt consolidation will instantly save you hundreds or even thousands of dollars, because many loans come with early repayment fees and penalties.

First, calculate how much you’re paying across all of your loan accounts each month, then check the terms of each loan contract to see how much it will cost for you to close your accounts. You can use a personal loan repayment calculator to help you. This will help you decide if the upfront cost will be worth the savings.


Before you apply for any debt consolidation loan it’s important to compare your options and make the right decision for you.

Elizabeth Barry

Elizabeth is a senior writer for finder.com.au specialising in personal finance. She enjoys reading PDSs so you don’t have to.

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