If you are juggling multiple debts across credit cards, personal loans, and other accounts, keeping track of different due dates, interest rates, and minimum payments can become overwhelming. A debt consolidation loan rolls all of those debts into a single loan with one repayment, one interest rate, and one due date. For many Australians, it is the simplest way to regain control of their finances and start making real progress on paying down what they owe.
This guide explains how debt consolidation loans work in Australia, who they are best suited for, and how to decide whether consolidating is the right move for your situation.
What Is a Debt Consolidation Loan?
A debt consolidation loan is a new loan that you use to pay off multiple existing debts. Instead of making separate payments to three, four, or five different creditors each month, you make one payment to one lender. The goal is to simplify your finances and, in most cases, reduce the total interest you are paying.
For example, if you owe $5,000 on a credit card at 20% p.a., $8,000 on a personal loan at 14% p.a., and $3,000 on a store card at 22% p.a., you could consolidate all three into a single personal loan at 9% to 12% p.a. You would pay off all three debts immediately and then focus on one repayment at a lower rate.
How Does Debt Consolidation Work?
The process is straightforward:
- Add up all your existing debts to work out the total amount you need to consolidate.
- Apply for a consolidation loan for that total amount. This can be a secured or unsecured personal loan, depending on your situation.
- Use the funds to pay off each existing debt in full. Some lenders will pay your creditors directly on your behalf.
- Make one regular repayment on your new consolidation loan until it is fully repaid.
The key benefit is that you replace multiple high-interest debts with one loan at a (usually) lower interest rate. This can reduce the total interest you pay and give you a clear end date for when your debt will be fully cleared.
Secured vs Unsecured Debt Consolidation Loans
When consolidating debt, you will typically choose between a secured or unsecured loan. Here is how they compare.
| Feature | Secured Consolidation Loan | Unsecured Consolidation Loan |
|---|---|---|
| Security required? | Yes (car, savings, or other asset) | No |
| Typical rate range | 6.49% to 12.99% p.a. | 7.99% to 18.99% p.a. |
| Loan amounts | Usually up to $100,000+ | Usually $2,000 to $50,000 |
| Risk | You could lose the asset if you default | No asset at risk, but missed payments hurt your credit score |
| Best for | Larger debts where you want the lowest possible rate | Smaller to mid-range debts or borrowers without assets to offer |
Most debt consolidation in Australia is done through unsecured personal loans because the debts being consolidated (credit cards, store cards, smaller loans) are themselves unsecured. However, if you have a larger total debt and own an asset like a car, a secured loan can significantly reduce the rate you pay.
Consolidating Credit Card Debt
Credit card debt is one of the most common reasons Australians look into consolidation. The average credit card interest rate in Australia sits above 19% p.a., and some cards charge over 22%. When you are only making minimum repayments, the majority of each payment goes toward interest rather than paying down the actual balance. It can take years to clear even a modest credit card balance this way.
By consolidating credit card debt into a personal loan at a lower rate (typically 8% to 14% p.a.), you pay less interest each month, which means more of your money goes toward reducing the balance. You also get a fixed repayment schedule with a clear end date, rather than the open-ended nature of a credit card where the debt can linger indefinitely if you keep spending on it.
Important: Once you consolidate your credit card debt, close or reduce the limit on the cards you have paid off. If you keep the cards open and start spending on them again, you will end up with the consolidation loan plus new credit card debt, which puts you in a worse position than where you started.
How Much Could You Save? A Worked Example
Here is a practical example comparing the cost of keeping three separate debts versus consolidating them into one loan.
Before Consolidation: Three Separate Debts
| Debt | Balance | Interest Rate | Monthly Payment |
|---|---|---|---|
| Credit card | $6,000 | 20.99% p.a. | $180 (minimum) |
| Personal loan | $8,000 | 14.49% p.a. | $250 |
| Store card | $2,000 | 22.00% p.a. | $60 (minimum) |
| Total | $16,000 | Blended ~18% | $490/month |
After Consolidation: One Loan
| Consolidation Loan | |
|---|---|
| Loan amount | $16,000 |
| Interest rate | 9.99% p.a. |
| Loan term | 3 years |
| Monthly repayment | $516 |
| Total interest paid | ~$2,576 |
| Debt-free date | Fixed: 3 years from settlement |
*Without consolidation, the credit card alone could take over 10 years to pay off at minimum repayments. With consolidation, all three debts are cleared in three years at a significantly lower blended interest rate.
Use the Loans123 loan calculator to estimate what your consolidation repayments could look like based on your total debt amount.
Is Debt Consolidation Right for You?
Debt consolidation works well in some situations and not in others. Here is a quick guide.
| Consolidation is a good fit if... | It may not be the right move if... |
|---|---|
| You have multiple debts at high interest rates (15%+ p.a.) | You only have one small debt that you can pay off quickly |
| You are finding it hard to keep track of multiple payments | The consolidation loan rate is not much lower than what you currently pay |
| You want a clear end date for when the debt will be fully cleared | You would extend the repayment term so long that total interest ends up higher |
| You can qualify for a lower interest rate than your current blended rate | You are likely to keep spending on the credit cards after paying them off |
The most important thing to check before consolidating is whether the new loan genuinely costs less than your existing debts. Compare both the interest rate and the total repayable amount over the full loan term. A lower monthly repayment does not always mean a cheaper loan if the term is significantly longer.
How to Get a Debt Consolidation Loan
Applying for a debt consolidation loan is similar to applying for any personal loan. Here is what you will need:
| What You Need | Details |
|---|---|
| List of existing debts | The balance, interest rate, and lender for each debt you want to consolidate. |
| Proof of income | Recent payslips (usually the last two or three) or tax returns if you are self-employed. |
| Bank statements | Three months of statements showing your income and expenses. |
| Identification | Driver licence or passport for identity verification. |
A broker can submit your application to multiple lenders at once, which saves you the time of approaching each one individually. It also means you can compare offers side by side and choose the one that genuinely costs you the least.
Debt Consolidation vs Refinancing: What Is the Difference?
These two terms are sometimes used interchangeably, but they are not quite the same thing.
Debt consolidation means combining multiple debts into one new loan. You are replacing several debts with a single loan.
Refinancing means replacing one existing loan with a new loan, usually to get a lower interest rate or better terms. For example, if you have a car loan at 12% and can get a new one at 8%, that is refinancing.
In practice, both aim to reduce the interest you are paying. If you have one large debt at a high rate, refinancing makes sense. If you have several smaller debts, consolidation is the better approach. Some borrowers do both at the same time, rolling an expensive car loan in with credit card debt into a single new loan.
Frequently Asked Questions
Can I consolidate my loans if I have bad credit?
Yes, though your options may be more limited. Some lenders specialise in working with borrowers who have had credit issues. A broker can help you find lenders who are more likely to approve your application. You may pay a higher rate than someone with excellent credit, but it can still be lower than the rates on your existing debts.
Will a debt consolidation loan affect my credit score?
Applying for any new loan creates a hard enquiry on your credit file, which can temporarily lower your score. However, once the consolidation loan is in place and you are making regular on-time repayments, your credit score should improve over time. Paying off multiple debts also reduces your overall credit utilisation, which is a positive signal to credit reporting agencies.
How much can I consolidate?
This depends on the lender and whether the loan is secured or unsecured. Unsecured consolidation loans typically range from $2,000 to $50,000. Secured loans can go higher. The amount you are approved for will depend on your income, expenses, credit history, and the total debt you want to consolidate.
How Loans123 Can Help With Debt Consolidation
Working out which debts to consolidate, what rate you can get, and which lender suits your situation takes time. Loans123 compares debt consolidation options across a panel of 30+ Australian lenders, so you can see your options in one place rather than approaching each lender individually.
Whether you are consolidating credit card debt, combining several personal loans, or rolling a car loan in with other debts, our brokers can walk you through your options and help you find the best deal.
To get started, apply online in a few minutes, or call us on 1800 079 147 to speak with a finance specialist directly.
Written by
Loans123 Team
The Loans123 team has over 10 years of experience helping Australians find the right finance solutions. We compare 30+ lenders to get you the best deal.
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