Debt consolidation means taking out one loan to pay out several existing debts, so you are left with a single lender, a single repayment and a single end date instead of four or five.
That can genuinely help. It can also make things worse, and the difference is not subtle. This page covers both, because deciding well matters more here than in any other kind of borrowing.
What consolidating actually does
It does three things. It simplifies, replacing several repayment dates with one. It can reduce the total repayment, usually by spreading the balance over a longer term. And it fixes an end date, which revolving credit like a credit card never does.
What it does not do is reduce what you owe. The debt is the same debt. You have changed who you owe it to and on what terms, which is useful, but the amount does not fall because you consolidated it.
What can be consolidated
- Credit cards and store cards
- Personal loans already running
- Buy now pay later arrangements
- Personal tax debt
- Overdrafts and other revolving facilities
- Car loans, in some circumstances, though a secured car loan is often already the cheapest debt you have and moving it is not always sensible
Buy now pay later is worth naming, because people often do not count it as debt. Lenders do, and several small arrangements running at once affect both your budget and what a lender will approve.
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The term trap
This is the thing to understand before anything else.
A consolidation loan usually lowers your monthly repayment. Sometimes that is because the interest rate is lower. Often it is because the term is longer, and a longer term means you pay more in total even though each repayment is smaller.
That trade can be entirely reasonable when the immediate problem is cash flow and the alternative is falling behind. But it should be a decision you make deliberately, not a saving you think you are getting. Ask for the total cost over the full term and compare it against what you would pay if you carried on as you are. If nobody will show you that number, that tells you something.
The comparison rate is the tool for comparing offers like with like, because fees differ more than headline rates do.
Secured or unsecured, and why it matters more here
An unsecured consolidation loan has no asset behind it. It is generally priced higher than secured lending because the lender carries more risk.
A secured consolidation loan, backed by a car or another asset, is usually priced better. But understand the change you are making: you are moving unsecured debt onto an asset. A credit card debt cannot cost you your car. Once it is secured against the car, it can.
That does not make it wrong. For many people the lower cost is worth it and the risk is theoretical. But it deserves a moment's thought rather than being waved through because the repayment looks better. Our guide to secured loans explains how security works.
When consolidating usually helps
Several debts at higher rates than a consolidation loan would charge. Particularly credit cards carried month to month, where minimum repayments are designed to keep the balance alive.
The repayments are manageable but the admin is not. Multiple dates, multiple lenders, occasional missed payments through disorganisation rather than shortage.
You want an end date. Revolving credit does not end. A loan does, and knowing when is worth something.
The behaviour that created the debt has changed. This is the important one and it is covered below.
When it usually does not
When the cards get used again. This is the most common failure by a distance. The debts are consolidated, the cards sit at zero, and within a year the cards are full again and the consolidation loan is still running. You have doubled the problem. If the spending pattern has not changed, consolidating buys time rather than solving anything.
When the term is stretched too far. A repayment you can afford over a term that outlasts the reason you borrowed is not a fix.
When you cannot service the new loan either. If the repayments do not fit even after consolidating, the answer is not another loan. Speak to your existing lenders about hardship arrangements, which they are required to consider, or to a free financial counsellor. The National Debt Helpline on 1800 007 007 is free, independent and confidential, and it is the right call when the problem is bigger than a restructure.
When you are being offered a guaranteed approval. No lender can guarantee approval and nobody reputable claims to. Offers framed that way are worth walking away from.
What lenders assess
- Income and employment, and whether the new repayment genuinely fits
- Your credit file, including recent applications and any defaults or arrears
- The debts being consolidated, including limits on cards, which count whether used or not
- Whether the cards will be closed, which some lenders require as a condition
Credit history that is not perfect does not automatically rule it out, and being matched to a lender that writes that profile matters more here than anywhere else, because applying to several and collecting declines damages the file you are trying to repair.
Where a broker fits
The useful work is not finding a consolidation loan. It is establishing whether consolidating actually leaves you better off, what it costs across the full term rather than per month, and whether secured or unsecured is the right structure for your situation. Sometimes the honest answer is that it will not help, and that is worth hearing before you apply rather than after. Our personal loans page sets out what we arrange, secured and unsecured, Australia-wide.
This article is general information only and is not financial advice. It does not take account of your objectives, financial situation or needs. If you are struggling with debt, free and confidential help is available from the National Debt Helpline on 1800 007 007.
Damo Treadgold is the director of Treadgold Finance, an FBAA-accredited finance broker on the Sunshine Coast, arranging personal, car, boat and equipment finance Australia-wide.
Frequently Asked Questions
What is a debt consolidation loan?
One loan used to pay out several existing debts, leaving you with a single lender, a single repayment and a single end date. It does not reduce what you owe; it changes who you owe it to and on what terms.
What debts can be consolidated?
Credit and store cards, existing personal loans, buy now pay later arrangements, personal tax debt and overdrafts. Car loans sometimes, though a secured car loan is often already your cheapest debt.
Will consolidating reduce my repayments?
Usually, but often because the term is longer rather than the rate being lower, which means paying more in total. Ask for the total cost over the full term and compare it against continuing as you are.
Is a secured consolidation loan better?
It is generally priced lower, but it moves unsecured debt onto an asset. A credit card debt cannot cost you your car; once secured against the car, it can. Worth deciding deliberately.
Can I consolidate with bad credit?
Sometimes, depending on what is on your file and how recent it is. Being matched to a lender that writes that profile matters more here than anywhere, because collecting declines damages the file further. No lender can guarantee approval.
What if I cannot afford the repayments even after consolidating?
Then another loan is not the answer. Speak to your existing lenders about hardship arrangements, which they must consider, or call the National Debt Helpline on 1800 007 007 for free, independent and confidential advice.
