How debt consolidation works
Debt consolidation means taking out one new loan to pay off several existing debts, like credit cards, store cards, buy now pay later accounts and personal loans. You're left with one repayment, one due date and usually a lower rate than the cards were charging.
Done well, it saves interest and makes debt far easier to manage. Done badly, it stretches the debt over a longer term and ends up costing more. That's why we show you the total cost of the new loan next to what you're paying now, before you decide.
When it makes sense
You're paying card-level interest
Credit card and store card rates are usually far higher than a personal loan. Moving those balances to a lower rate saves money from day one.
You're juggling several due dates
Missed repayments because debts fall due on different days can do more damage to your credit file than the debts themselves.
You won't run the cards back up
The biggest risk is clearing the cards and filling them again. Closing them, or cutting the limits once they're paid off, matters as much as the new loan.
When it does not
It does not make sense if the new loan is not clearly cheaper once fees are counted, if the repayment only works over a much longer term, if you are likely to use the cards again, or if the debt is already more than you can repay. In that last case, talk to a free financial counsellor first.
What to compare
Total cost, not the repayment
A lower monthly repayment over a longer term can cost more overall. We show the total interest both ways.
Fees to get in and out
Establishment fees on the new loan and any payout fees on the old ones. Both belong in the sum.
Secured or unsecured
Securing the new loan against a car can lower the rate. Using home equity lowers it further, but puts your home behind the debt.
For example, moving card debt to a loan over seven years instead of three lowers the repayment, but you pay interest for four extra years. We show the total both ways.
More on that trade-off in secured vs unsecured loans.
Try these first
- Call your lenders and ask about a hardship arrangement
- Ask your card provider for a lower rate
- Consider a balance transfer card, if you can clear it inside the interest-free period. Check the rate it reverts to
- Get free, independent help from the National Debt Helpline on 1800 007 007, Monday to Friday, 9.30am to 4.30pm
Using your home loan instead
If you own a home, rolling debts into the mortgage usually gets the lowest rate. But it turns a few years of debt into decades, can cost more in total unless you pay it off faster, and means your home secures debts that were not secured before. We show the loan and the home loan option side by side, total cost included. See home loans.
Watch out for debt fix firms
Some businesses charge big fees to "fix" debt or clean up a credit file. ASIC warns their fees can be very high and can leave people worse off. Before you sign with anyone, check they hold an Australian credit licence, or are authorised under one, on ASIC's professional registers and are a member of AFCA, the free complaints service. Fixing wrong information on your credit report is free: ask the credit reporting body directly.
What lenders look at
Your income, your credit file and how the debts built up. Steady income and a record of paying on time help most. If your file has a few marks on it, specialist lenders may still help. See bad credit finance.
Debt consolidation questions
Will debt consolidation hurt my credit score?
Applying for the new loan adds an enquiry to your file. Over time, one loan paid on time and lower card balances can work in your favour.
Which debts can I consolidate?
Credit cards, store cards, buy now pay later, personal loans and car loans are the most common. Other debts depend on the lender.
Can I roll my debts into my home loan?
Often, yes, and the rate is usually lower. But you'd be spreading short-term debt over a much longer term, which can cost more in total. We'll show you both options side by side.
Can I consolidate with bad credit?
Sometimes. It depends on what's on your file and your income now. If it isn't the right move, we'll tell you.
What if consolidation isn't right for me?
We'll say so. If the numbers don't work, free, independent help is available through the National Debt Helpline.
What credit score do I need?
There is no single number. Lenders look at your whole file, your income and how the debts built up. If your file has marks on it, see bad credit finance.
What happens to my credit cards afterwards?
Close them or cut the limits. Some lenders pay the debts directly and ask you to close the cards as part of the loan.
Is this the same as a debt agreement?
No. A consolidation loan is a new loan that pays your debts in full. A debt agreement is a formal, legally binding deal under the Bankruptcy Act to pay creditors part of what you owe. Proposing one is an act of bankruptcy, it is listed on the National Personal Insolvency Index, and it can stay on your credit report for up to 5 years, or longer in some cases. Talk to a financial counsellor before considering one.
Read our full guide, debt consolidation: how it works, and when it stacks up, or compare personal loans.
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