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Many people refinance or consolidate debts in an attempt to make their loan repayments more affordable in the short term.

However, the overall cost of a new loan should be significantly lower than what you have been paying for this to be an effective debt management strategy. Costs that need to be considered include not only interest rates, but establishment fees, service fees and fees for discharging and creating a new mortgage.

Consumer Action recently assisted in a matter where a consumer sought a loan for $6,250 from GE Money for the purpose of consolidating her debts.  According to the loan documents, approximately $1,280 was for small debts, and an additional $4,700 was for ‘debt consolidation’.  The documents showed that $4,700 was in fact used to pay off a single credit card debt with a major bank, which the client then closed.

Loan documents show that GE Money gave the consumer a 5 year loan at an exorbitant 34.95% per annum interest—meaning she was repaying over $14,000 (including interest, fees and charges) for consolidating debts worth approximately $6,000. Given that credit card interest rates are commonly in the vicinity of 20%, it’s likely the GE Money loan put the client into a worse, not better, financial position.

We looked at GE’s Money’s website in October 2013 to see what interest rates were being advertised.  Both personal^[1] and debt consolidation^[2] loans were being advertised as being from 17.49% p.a. for loan amounts less than $20,000. On closer inspection, these rates were asterisked with the fine print stating that these rates were only available to approved customers and subject to lending and approval criteria.

Our consumer ended up with a contract which had a much higher interest rate than what is being advertised here. Remember, the rate that will apply to your loan is the rate stated in the contract you sign, not the rate advertised. Always read the fine print and if you don’t like the rate you are quoted, shop around for a better deal.

Consumers considering a debt consolidation loan should read our fact sheet or visit MoneyHelp and MoneySmart for free and independent information about your options.  If you are experiencing financial hardship, contact a financial counsellor on 1800 007 007 for free and confidential financial advice.

And remember—while it might be promoted as easy and affordable, there may be better options available to you than a debt consolidation loan.  Get good free professional advice before you take action!