The hidden costs of changing loans

A lower rate can be cancelled out by the costs of leaving old debts and setting up a new loan. Before consolidating, collect every fee on both sides of the change. Small omissions can turn a modest saving into a more expensive refinance.

Costs attached to the old debts

Ask each creditor for a dated payout figure. Check for early-repayment, discharge or administration fees. A payout figure may include interest accrued since the last statement, so it can differ from the balance shown in an app.

The new loan may charge an application or establishment fee, monthly or annual fees and a fee for early repayment. If property is used as security, valuation, legal, settlement or mortgage-related costs may apply.

Some fees are deducted upfront. Others are added to the amount borrowed. A fee added to the balance can attract interest across the term, so include it in both the loan amount and total repayment calculation.

Add up every exit, establishment and ongoing fee before deciding whether to change loans. Installing WeMoney and connecting your accounts gives you another useful view of the debts and regular expenses already in the household budget. Use it to review personalised savings opportunities that could improve the position before you pay to refinance.

Work out the break-even point

If switching costs $600 and the new arrangement is estimated to reduce interest and fees by $75 a month, the simple break-even point is around eight months. If you expect to repay or refinance before then, the change may not recover its setup cost.

Moneysmart recommends getting all loan costs and the interest rate in writing before signing. Keep the written schedule with your comparison so the decision is based on the actual option, not an advertised example.

Request early-payout, discharge and break costs. A fixed personal loan or secured loan may charge more than the balance shown in the app. Add residual interest and any annual fee due before closure.

Fees on the new loan

Check application, establishment, monthly, annual, brokerage, valuation and legal costs where relevant. Ask which fees are paid upfront and which are financed. A financed fee can attract interest.

A new loan offers a $90 lower monthly repayment. It charges a $450 establishment fee, $12 monthly fee and $300 in old-loan payout costs. Over 4 years, the known fees total $1,326 before interest on any financed amount. The repayment difference needs to be read with that cost.

Late-payment, dishonour and early-exit fees may not occur, however they matter when the budget is tight or early repayment is planned. Fixed-rate break costs may depend on market rates and timing.

Settlement shortfalls

Payout figures can expire. If the approved amount is based on old balances, daily interest or pending card transactions can create a shortfall. Confirm who pays it and whether settlement will be delayed.

Divide upfront switching costs by the estimated monthly reduction in interest and ongoing fees to get a rough break-even period. Then model the complete loan, because a simple break-even calculation does not capture term extension.

Create a complete switching-cost record

Make one list for the debts being closed and another for the proposed loan. The first list should include dated payout figures, discharge or early-termination charges, interest that may accrue before settlement and any annual fee that is about to be charged. The second should include application, establishment, valuation, legal, monthly and annual costs, plus any fee added to the new balance.

Mark whether each cost is paid upfront or financed. A $400 fee paid from savings costs $400. The same fee added to the loan attracts interest until it is repaid. If the fee is rolled into a long loan, the final cost can be noticeably higher. Ask for the actual opening balance so you can see whether the amount borrowed is larger than the debts being cleared.

Use the difference in interest and fees to estimate the break-even point. If changing loans costs $900 and is expected to save $60 a month, it takes about 15 months to recover the switching cost (illustrative). A planned sale, refinance or early payout before then can remove the expected benefit. Repeat the calculation if the new rate is variable.

Keep the record until every old account is closed. Settlement figures can change, pending card transactions may appear and small residual balances can remain. Check the next statement from each creditor, pay any shortfall and obtain closure confirmation where that was the plan. This final check prevents a modest leftover amount from becoming another active debt beside the consolidation loan.

Keep a small margin for figures that can move before settlement, but do not borrow a large unexplained buffer. Ask how any unused amount will be handled and whether it will reduce the new balance. Once settlement completes, reconcile the approved amount against creditor receipts so every dollar added to the loan has a stated purpose.

Keep the cost check attached to the decision, not buried in separate product documents. List every one-off cost, every recurring fee and any amount that must be paid before the old debts can close. Then add the cost of keeping the new loan for its full term. If a fee is waived conditionally, record the condition and what happens if it is not met. This simple ledger makes it harder for an attractive repayment to hide the price of changing products. It also gives you a clean reference if the final contract differs from the quote you compared.

Frequently asked questions

Are broker fees included in the comparison rate? Not always. Ask who pays the broker and whether any borrower fee applies. Can I avoid establishment fees? Product pricing varies, so compare the total rather than chasing a fee-free label. Are early-payout costs always charged? They depend on the contract and timing.

Small fees can become meaningful

A $15 monthly fee equals $900 over 5 years before any interest on financed fees. An annual card fee that arrives after settlement can leave an old account owing. Put every known amount onto a dated schedule rather than relying on one fee total.

If a provider cannot explain whether a fee is paid upfront, deducted from proceeds or added to the balance, resolve that before accepting the loan. The treatment affects both the settlement amount and the eventual cost.

Sources

Moneysmart: Debt consolidation and refinancing

Moneysmart: Personal loans

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.

Add every payout, establishment and application cost to the amount you expect to repay. Then work out how long the new rate must apply before those costs are recovered. If you plan to sell, refinance again or repay early before that point, the advertised saving may never reach your bank balance.