Debt refinancing means replacing or extending an existing loan with a new one, either with your current lender or a different one. It only saves money if the total you repay, after the old loan's payout costs and the new loan's fees, is lower than staying where you are.
This guide explains how refinancing differs from consolidating, what to compare before you switch, the risks to weigh up and what to do instead if repayments are already hard.
How refinancing works
When you refinance, a new loan pays out what you still owe on an existing one, and you then repay the new loan. Your current lender can arrange it or another lender can, and the new loan may have a different rate, term, repayment or set of features.
People most often look at refinancing a personal loan or a car loan. The aim is usually a lower total cost or a more manageable repayment, but neither is guaranteed, so the numbers have to be checked each time.
Refinancing, consolidation and balance transfers
These terms are often used as if they mean the same thing, but each works differently. This table sets out what each one does, with a hardship variation included as an alternative for anyone already struggling.
Option | What it means and what to check |
|---|---|
Refinancing one loan | A new loan replaces or extends an existing one. Check the payout cost, new fees, term and total repaid |
Consolidating several debts | Several debts are rolled into one new loan, which is often done by refinancing. Check the total cost of the new loan against the debts it replaces |
Credit card balance transfer | Card debt moves to a card with a lower promotional rate for a set time. Check when the rate ends, the rate after it and the transfer fee |
Hardship variation (an alternative) | Not a refinance: your current lender changes the loan because of hardship. Ask the lender's hardship team |
Source: Moneysmart, October 2026.
If you have several debts rather than one, our guide to consolidating several debts covers that case in more detail.
A balance transfer is a separate product with its own conditions. If the balance isn't cleared during the promotional period, a higher rate applies, and new purchases on the card usually attract a much higher rate than the transfer.
Moneysmart suggests cancelling the old card after a transfer to avoid the temptation of new debt, and notes that a transfer might not be right if you're already struggling with card repayments. Whether to close a card is your decision, but an open limit can fill up again.
The full-cost test
To know whether refinancing saves money, compare like with like. Work out what staying on your current loan will cost from today, then what the new loan will cost, including everything needed to switch.
- The amount you still owe on the current loan and how long is left to repay it.
- The cost of staying: everything you'd repay on the current loan from today to the end, including ongoing fees.
- The switching charges: any early repayment charge on the current loan, plus the new loan's upfront fees, such as application and legal fees, and valuation fees or stamp duty that some lenders charge on secured loans.
- The new loan's interest rate, comparison rate, term and repayment for the amount needed to pay out the current loan.
- The cost of switching: everything you'd repay on the new loan, plus any switching charges you pay separately rather than add to the loan.
Refinancing saves money only if the cost of switching is lower than the cost of staying. The new loan already covers the balance you're paying out, so count only the extra charges once, and don't add the payout balance again on top.
A lower monthly repayment or a lower advertised rate on its own doesn't show a saving, because a longer term or extra fees can outweigh it.
The comparison rate helps, because it combines the interest rate with most fees for a set example. ASIC notes that it doesn't include all fees, such as charges that apply only if you pay a loan off early, so it may not match your own amount and term.
A lower rate over a longer term
Moneysmart gives an example of a $20,000 debt refinanced to lower rates over longer terms. At 10% over 5 years the total cost is about $25,496, at 8% over 10 years about $29,119, and at 6% over 15 years about $30,379.
The rate falls each time, but the total rises because interest is charged for longer. Our guide to how the loan term changes the total works through a fuller comparison of repayment periods.
When refinancing may help, and when it can make things worse
Moneysmart sets out four conditions for consolidating or refinancing to help. If any of them isn't true, it warns the move can make your situation worse rather than better.
It may help when | It can backfire when |
|---|---|
The new rate and fees are lower than what you pay now | The new rate or fees are higher, or payout costs outweigh any saving |
The new term isn't longer than what's left on your current loan | The term is stretched, so you pay interest for longer |
You can afford the new repayment and keep paying it | The repayment only fits if nothing in your budget changes |
You stop using the old credit and don't borrow more | Old limits stay in use and fill up again |
Source: Moneysmart, October 2026.
Risks to check before you switch
Even when the totals look better, a few risks can change the picture. These are worth checking before you sign.
Putting an asset on the line
A lower rate is sometimes offered if you turn unsecured debts, such as cards or personal loans, into a loan secured against your car or home. If you then can't keep up the repayments, the lender could sell that car or home to recover what's owed.
Unsecured loans often carry a higher rate than secured ones, which is why the swap can look attractive. Weigh that lower rate against what you could lose.
Rate rises and income changes
On a variable rate, repayments can go up as interest rates change. Before you commit, check you could still afford the new repayment if rates rise, your income drops or your living costs go up.
A fixed rate keeps scheduled repayments the same for the fixed period, but that doesn't protect you from a fall in income or a rise in other bills.
Early repayment costs
A fixed-rate loan may come with a fee for paying it off early, and that can apply to the loan you're leaving as well as the one you might take out. Variable-rate loans often give more flexibility to make extra repayments or pay the loan out early.
Ask both lenders about these costs in writing. Moneysmart notes that if you want to pay a loan off quickly, you may not want one with an early repayment fee.
New credit after refinancing
Refinancing can free up room on cards or other credit, and Moneysmart warns that more credit may tempt you to spend more. If that room is used again, you end up with the new loan plus fresh debt.
Each application for credit is also recorded on your credit report, and applying for a lot of loans in a short time can hurt your credit score. Our guide to common debt traps explains how repeated borrowing can build up.
Watch out for unrealistic promises
Some businesses claim they can clear anyone's debts, whatever the amount, which may be unrealistic. Moneysmart's warning signs include a business that:
- has no licence
- wants you to sign documents that are blank
- won't talk about repayments, or pushes you to decide quickly
- won't give you every cost and the rate in writing before you commit
- wants to set up a business loan when an ordinary consumer loan would do
You can check whether a business is licensed on ASIC's Professional Registers Search before you deal with it.
If repayments are already hard
If you're already struggling, a new loan may not be the best first step. Ask your lender's hardship team about a hardship variation, which can change the loan term or reduce or pause repayments for a while, and ask other lenders whether they can change your repayments.
As Moneysmart explains, lenders must consider a request for hardship help and assess what help is available. A free financial counsellor can also talk you through the choices you have and work out a plan with you.
The free National Debt Helpline is on 1800 007 007 (weekdays 9:30am to 4:30pm), or you can use its live chat (weekdays 9am to 8pm). Our guide to getting out of debt covers the next steps.
Frequently asked questions
What is debt refinancing?
It's replacing or extending an existing loan with a new one, with your current lender or a different one. The new loan pays out what you owe on the old one.
Is refinancing debt a good idea?
It can be when the total you'll repay, including payout costs and new fees, is lower and the term isn't longer. If the rate or fees are higher, or the term is stretched, it can cost more.
Is refinancing the same as debt consolidation?
Not quite, because consolidation rolls several debts into one new loan, which is often done by refinancing. Refinancing can also replace a single loan.
Does refinancing affect your credit score?
Moneysmart says each application for credit is recorded on your credit report, and applying for a lot of loans can hurt your credit score. Your report also records your repayment history on the loans you hold.
Can I refinance if I'm behind on repayments?
It's worth talking to your lender's hardship team and a free financial counsellor first. Refinancing while you're already behind carries extra risk, especially if it puts an asset on the line.
Before you decide
Refinancing is worth it only when the total cost of the new loan, including switching costs, is lower than staying put and the repayments stay affordable. If repayments are already hard, free help and a hardship request come before any new loan.
This article provides general information about refinancing and is not personal financial advice. Consider your own circumstances, compare the full cost of any loan and speak with a free financial counsellor if repayments are difficult.
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Written by
Trent Cray
Finance Specialist, Loans 123
Trent is a Finance Specialist at Loans 123 in Victoria Park, Perth. He helps customers compare more than 30 lenders to find car, personal and business finance that suits their situation.
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