Many Australian families juggle a credit card, a car loan, a store card and a personal loan all at once. Each debt carries its own interest rate, due date and minimum repayment. It becomes hard to see what you actually owe, and harder still to pay it down.
So is debt consolidation a good idea, or just one more loan on top of the rest? The honest answer is that it depends on the fine print, not the headline interest rate. A well-structured debt consolidation loan can save you money and simplify your repayments. A poorly structured one can cost thousands more over the life of the loan.
This guide explains how debt consolidation works, the pros and cons of debt consolidation, when it makes sense and when it doesn’t, and what to check before you sign. We also explain how Everest Home Loans, a multilingual mortgage broker working with Nepali, Indian and other multicultural families across Australia, helps clients compare their options.
Key Takeaways
Debt consolidation only helps when it lowers your total cost, including fees, not just your monthly repayment.
A longer loan term can wipe out the benefit of a lower interest rate.
Rolling unsecured debts into a loan secured against your home puts your home at risk if repayments slip.
Close or cut the limits on old credit cards so you don’t build new debt.
Talk to a licensed mortgage broker, or call the free National Debt Helpline on 1800 007 007, before you sign.
Table of Contents
- What Is Debt Consolidation and How Does It Work?
- Pros and Cons of Debt Consolidation
- When Is Debt Consolidation a Good Idea?
- When Is Debt Consolidation Not a Good Idea?
- What to Check Before You Consolidate Your Debt
- How Can Everest Home Loans Help With Debt Consolidation?
- The Bottom Line
- Frequently Asked Questions
What Is Debt Consolidation and How Does It Work?
Debt consolidation means combining multiple debts into one new loan. Credit card balances, store cards, buy now pay later accounts, car loans and personal loans are paid out by the new lender. You then make one monthly repayment instead of five. That can make your debt easier to manage and your budget easier to track.
In Australia, there are three common ways to consolidate your debt:
Debt consolidation personal loan. An unsecured personal loan, often at a fixed rate over one to seven years. Personal loan terms are short, so you pay off your debt faster.
Refinancing your home loan. You use your home equity to roll other debts into your mortgage. The interest rate is usually lower, but the repayment period is usually much longer. Read more about refinancing for cash out.
Balance transfer credit card. You move credit card debt to a new card with a low or zero interest period. It suits smaller debts you can clear within that period.
Every option is subject to credit approval. The lender checks your income, expenses, credit history and existing loan commitments before it makes a loan offer.
Pros and Cons of Debt Consolidation
Before deciding, consider the pros and cons side by side.
| Pros | Cons of debt consolidation |
|---|---|
| One repayment and one lender to deal with | Fees and charges can cancel out the savings |
| A lower interest rate than most credit cards | A longer loan can mean more interest overall |
| A fixed rate and set end date help you plan | A secured loan puts your home or car at risk |
| On-time repayments can improve your credit score | Freed-up credit cards can lead to new debt |
| Lower monthly repayments can ease cash flow | A new application can briefly affect your credit score |
When Is Debt Consolidation a Good Idea?
Debt consolidation is a good idea when these conditions line up:
The new loan has a lower interest rate and lower total cost, including fees, than your existing debts.
The loan term is the same as, or shorter than, the time it would take to clear your current debts.
The new monthly repayment fits comfortably within your budget.
You are ready to close old credit cards or reduce their limits and change your spending habits.
The loan term matters as much as the rate. The example below uses a $20,000 loan amount. The lower interest rate looks cheaper each month, but the longer loan costs more over the life of the loan.
| Loan term | Interest rate | Monthly repayment | Total repaid |
|---|---|---|---|
| 5 years | 10% | $425 | $25,496 |
| 10 years | 8% | $243 | $29,119 |
| 15 years | 6% | $169 | $30,379 |
| 30 years (added to a home loan) | 6% | $120 | $43,168 |
Figures are illustrative only, based on monthly principal and interest repayments and excluding fees.
If you roll $20,000 of credit card debt into a 30-year home loan, you could pay more than $23,000 in interest. You can avoid most of that by making extra repayments that clear the consolidated amount over a shorter period, such as three to five years.
When Is Debt Consolidation Not a Good Idea?
Debt consolidation may not help, and can make things worse, in these situations:
The fees outweigh the savings. Your existing lender may charge early repayment or discharge fees. A fixed rate existing loan may carry break costs. The new lender may charge application, valuation, legal, settlement and government registration fees. Compare the total cost of the loan, including fees.
The loan term is much longer. As the table shows, a longer loan can mean less interest each month but more interest in total.
You turn unsecured debts into secured debt. Credit cards and personal loans are unsecured. Once you add them to your mortgage, they are secured against your home. If you fall behind, the lender can sell the property to recover the debt.
You keep spending. If you keep the old credit cards open and use them again, you end up with the new loan plus new debt in the future.
You are already in serious hardship. A new loan may not fix the problem. Ask your lenders about a hardship arrangement and speak with a free financial counsellor first.
Be careful with debt management firms that promise to clear any amount of debt. ASIC’s Moneysmart guide to debt consolidation and refinancing lists the warning signs. Always confirm that a lender or broker holds an Australian Credit Licence, or is an authorised credit representative of a licensee.
What to Check Before You Consolidate Your Debt
Use this checklist before you apply for a personal loan or refinance:
List your total debt. Note each type of debt, the balance, the interest rate, the monthly repayment and any payout fee.
Compare the comparison rate. The comparison rate includes most fees, so it gives a truer picture than the advertised rate.
Check the terms and conditions. Look for early repayment fees, monthly account fees and whether you can make extra repayments.
Match the loan term to your goal. Choose the shortest repayment period you can comfortably afford.
Check your credit report. Your credit history affects which lenders will approve you and at what rate. Learn about accessing your credit report for free.
Plan for the old accounts. Decide which credit cards you will close and set a realistic budget.
Think about your wider plans. If you plan to buy a home or investment property soon, a new loan or a higher mortgage can reduce your borrowing power.
How Can Everest Home Loans Help With Debt Consolidation?
Everest Home Loans compares home loan refinancing and personal loans for debt consolidation across a panel of 40+ banks and lenders. Instead of taking whatever one bank offers, you see options side by side, including the fees and the cost over the full loan term.
We look at your whole financial situation, not just the monthly repayment. Sometimes the best answer is to consolidate. Sometimes it is a shorter loan term, a balance transfer, or extra repayments on the debt with the highest interest rate.
Mortgage broker since 2015, with more than 1,500 home loans settled
Platinum Broker status with Commonwealth Bank, Westpac and NAB
Service in English, Nepali and Hindi through our Nepali mortgage broker team
Clients served across Australia, in person, by phone or by video, including as a mortgage broker in Melbourne
The Bottom Line
Debt consolidation is not automatically good or bad. It is a good idea when the new loan lowers your total cost, has a sensible loan term, fits your budget and comes with a plan to avoid new debt. It is a poor idea when fees, a longer loan or new spending eat up the savings.
Run the real numbers before you sign. If you would like help comparing your options, contact Everest Home Loans for a free, no-obligation review.
Frequently Asked Questions
Does Debt Consolidation Affect Your Credit Score?
Applying for a new loan adds a credit enquiry to your file, which can lower your credit score slightly for a short time. Several applications in a short period can affect your credit more. After that, on-time repayments and lower credit card balances can help improve your credit score over time.
Can I Consolidate Debt If I Have Bad Credit?
Often, yes, but expect a higher interest rate, a smaller loan amount or a requirement for security such as your home or car. Borrowers with excellent credit usually get the best loan offer. A broker can show you which lenders suit your credit history before you apply, so you avoid unnecessary enquiries.
Is It Better to Consolidate Debt or Use a Balance Transfer?
A balance transfer suits smaller credit card debt that you can clear within the interest-free period. Any balance left after that period reverts to a high rate. A debt consolidation loan suits larger or mixed debts, because it gives you a fixed repayment and a set end date.
How Long Will It Take to Pay Off $20,000 in Credit Card Debt?
At an interest rate of 20% p.a., paying $500 a month takes about five and a half years and costs about $13,200 in interest. Paying $750 a month cuts that to about three years and $6,700 in interest. A lower-rate debt consolidation loan with the same repayment can reduce your debt faster.
How Long Does the Debt Consolidation Process Take?
An unsecured personal loan can be approved in a few days. Refinancing a home loan to consolidate debt usually takes a few weeks, because it needs a valuation and settlement. A broker can manage the paperwork and keep each lender moving.
General information only. This article does not take into account your objectives, financial situation or needs. Consider whether it is appropriate for you and seek personalised advice before acting. All loans are subject to lender terms, conditions and credit approval. Everest Home Loans (ACR 506833). Rajesh Kandel is an Authorised Credit Representative (476341) of Connective Credit Services Pty Ltd, ABN 77 161 731 111, Australian Credit Licence 389328.
