Consolidating Debt vs. Borrowing to Cover a Repayment: What's the Difference?

Consolidating Debt vs. Borrowing to Cover a Repayment

Say you've got a repayment due this week and not quite enough coming in to cover it. A new loan, credit card or extra credit can look like the fastest way through. Or maybe you're thinking about combining a few debts into one so there's just one repayment to manage.

Both involve borrowing to deal with debt you already have, but they play out very differently. One can replace existing debts. The other leaves them in place and adds a new one on top.

Is borrowing to repay debt the same as debt consolidation?

Not necessarily. With debt consolidation, the new loan pays out the debts you're consolidating, and those old accounts get closed. You end up with one debt instead of several; on a new rate, fees and repayment term.

Borrowing just to make a repayment is a different story. Using a new loan, a credit card cash advance or extra credit to cover this month's repayment still leaves the original debt exactly where it was. Now you've got the old debt plus the new borrowing.

That doesn't make every refinance or consolidation a bad idea. A genuine refinance can make debt easier to manage or cut the overall cost. But if you keep borrowing because your income can't cover repayments, that's a sign the real shortfall hasn't been fixed.

Here's how the three main options stack up.

Does a lower repayment always mean a better deal?

Not necessarily. A smaller monthly repayment might be easier to manage but that doesn't mean the debt costs less overall. When you're comparing a new arrangement, look at the interest rate, fees and loan term, not just the monthly repayment.

A lower monthly repayment can still cost you more overall. Here's a simple example: same $10,000 balance, same example interest rate, over two different loan terms. The figures are illustrative only.

In this example, the monthly repayment is a lot lower over five years, but you end up paying more than $2,600 extra because interest keeps building for longer. A longer term might still suit your budget, but check the full cost before assuming a smaller repayment is the cheaper option.

If the new loan is secured against your car or home, the risk changes too. It means that asset is on the line if you can't keep up with repayments.

What should you check before borrowing more to deal with debt?

Before taking on more credit, check whether your existing debts will be fully repaid and the old accounts closed. It’s also worth looking at how much you’ll repay in total, whether you’re putting your car, home or another asset at risk, and whether you’ll still be short each month after covering essential living costs and the new repayment.

If the numbers still don’t add up, another loan may not address the underlying problem.

What if you can't keep up with your repayments at all?

If you’re struggling to make your repayments, contact your lender as soon as you can and ask about financial hardship assistance. If you’re having trouble meeting your obligations under a regulated credit contract, or think you’re about to, you can generally make a hardship request in writing or over the phone.

Depending on your circumstances, your lender may be able to adjust your repayments, extend the loan term or pause repayments for a period. They may ask for more information before making a decision, and the options available will depend on your situation.

If you’re unhappy with how your hardship request is handled, or you don’t receive a response, you may be able to take the matter to the Australian Financial Complaints Authority (AFCA), which provides a free dispute resolution service for consumers.

If you’re not sure where to start, or you’re dealing with several debts, the National Debt Helpline (1800 007 007) offers free, independent financial counselling.

What if you can't pay everything this month?

When money is tight, the debt with the highest interest rate isn't always the first thing to pay. You need to consider essentials like housing, essential transport and utilities; because falling behind on these can have more serious consequences. The right order depends on your own situation.

Will asking for hardship hurt my credit report?

Not in the same way a default does. There are three different things worth separating:

Asking for hardship assistance is different from defaulting on a loan. A default generally involves more than a single missed payment and is subject to specific notice requirements.

And even if information appears on your credit file, it doesn’t automatically determine whether a future application will be approved. Each lender assesses applications based on its own criteria and the applicant’s circumstances.