Debt consolidation: how it works, and when a loan costs more
Debt consolidation means rolling several debts, such as credit cards, buy now pay later and personal loans, into one new loan or card with one repayment, ideally at a lower rate. It saves money only if the new rate and fees are lower and you don't stretch the debt over a longer term. Moneysmart warns it can cost more, and can put your home or car at risk if you turn unsecured debts into a secured loan.
Use the debt consolidation calculator below to compare your own debts with one new loan. This guide sets out the ways to consolidate, the maths (including how a lower rate over a longer term can cost you more), the options with bad credit, the effect on your credit report, what formal debt relief involves, the debt firms to avoid, and the free help available before you borrow more.
By Better Rate Mate Editorial Team · Last reviewed
General information only. It doesn't take into account your objectives, financial situation or needs. Check the lender's key facts sheet, credit guide and TMD before you apply. We don't compare every lender, and we may earn a commission if you apply through our links.
Debt consolidation calculator
Compare what your debts cost at your current repayments with one new loan. Estimates only.
Your debts now
- Total owed
- $15,000
- Repayments a month
- $450
- Time to clear them all
- 4 yr 3 mth
- Total interest
- $6,546
One consolidation loan
- Amount borrowed
- $15,000
- Repayment a month
- $480
- Time to clear it
- 3 years
- Total interest and fees
- $2,298
The loan saves about $4,248 in interest and fees, if you close or cut the limits on the debts you pay off and don't borrow again.
At this rate and these fees, every term from 1 to 7 years costs less than your current repayments, but the longer the term, the less you save.
Each debt at your current repayment
| Debt | Time to clear | Interest |
|---|---|---|
| Credit card | 4 yr 3 mth | $5,246 |
| Second card | 3 yr 7 mth | $1,301 |
Assumes interest is charged monthly at the annual rate ÷ 12, your current repayments stay the same each month, rates don't change and you don't add new debt. Card issuers calculate interest daily, so real figures differ slightly. It doesn't include annual card fees or late fees. General information only, not a quote or financial advice.
The starting rates are the RBA's averages: 21.24% for standard and 13.49% for low rate credit cards (September 2026), and 9.50% for new personal fixed-term loans (August 2026). Replace them with the rates on your statements and quote.
What is debt consolidation?
Debt consolidation is replacing several debts with one: you take out a new loan or card, use it to pay off the others, and make a single repayment from then on. It's worth doing when the one new debt costs less in total than the old ones, has a clear end date, and you stop using the credit you paid off.
Ways to consolidate debt
There's more than one way to do it, and they differ a lot in cost and risk:
| Option | Typical cost | Risk | Credit report | Who it suits |
|---|---|---|---|---|
| Personal (consolidation) loan | Interest, which averaged 9.50% on new personal fixed-term loans in August 2026, plus fees | A fixed term; can cost more if the term is longer than your current debts | An application enquiry (5 years), then 2 years of repayment history | Several debts you can clear over a set term |
| Balance transfer credit card | 0% or a low rate for a set period, a one-off fee of about 2% to 5%, then a revert rate, often the cash advance rate | Whatever's left when the offer ends; new spending on the card | An application enquiry (5 years) | Card debt you can clear inside the promotional period |
| Home loan top-up or refinance | A home loan rate, but over the remaining home loan term | Your home secures what was unsecured debt; far more interest over 20 or more years | An application enquiry if you refinance | Rarely the first choice; only with a plan to clear that portion quickly |
| Informal arrangement through a financial counsellor | Free counselling; the plan depends on what creditors agree | Creditors don't have to agree | Hardship arrangements show for 12 months and don't lower your score | Anyone struggling to keep up, before borrowing more |
| Part IX debt agreement (AFSA) | Administrator fees, paid from your repayments | An act of bankruptcy; long-term effect on getting credit | On your credit report and the National Personal Insolvency Index for 5 years or more | Unmanageable unsecured debt, within AFSA's limits, after advice |
How debt consolidation works
You take out a new loan, usually a personal loan, and use it to pay off your existing debts. You then make one regular repayment to one lender. Refinancing means replacing a loan with a new one, and the two are often combined. Some people consolidate into their home loan instead, which usually has a much lower rate but a much longer term, and turns unsecured debt into debt secured against your home.
Moneysmart's test is that consolidation may help when four things are true: you pay less overall, the new loan has a clear end date no longer than your current debts, you can afford the repayment, and you stop using the old credit. If any of those isn't true, it can make things worse.
The maths: a lower rate over a longer term can cost more
Take $15,000 of credit card debt at the RBA's average standard card rate of 21.24% (September 2026). Clearing it in 3 years takes $567 a month and $5,411 in interest. A consolidation loan at 9.50% over the same 3 years saves about $3,113. Stretch the loan to 7 years and the repayment falls to $245, but the interest rises to $5,593, more than the card would have cost over 3 years.
Moneysmart gives its own example: $20,000 at 10% over 5 years costs $25,496 in total, while the same debt at 6% over 15 years costs $30,379. Lower repayments feel like progress, but the total cost is what matters.
| Option | Monthly repayment | Total interest |
|---|---|---|
| Credit card at 21.24%, cleared in 3 years | $567 | $5,411 |
| Consolidation loan at 9.50%, 3 years | $480 | $2,298 |
| Consolidation loan at 9.50%, 5 years | $315 | $3,902 |
| Consolidation loan at 9.50%, 7 years | $245 | $5,593 |
Credit card debt consolidation: a loan or a balance transfer?
If most of your debt is on credit cards, a balance transfer can beat a loan: 0% for the offer period, for a one-off fee. It only works if you can clear the balance before the offer ends, because what's left then reverts to a higher rate, often the cash advance rate. A personal loan suits a debt that will take longer than any 0% period to repay, because it has a fixed term and a fixed end date.
Run both: the balance transfer calculator shows what's left when the offer ends and the repayment that clears it in time, and the calculator on this page prices the loan.
Debt consolidation with bad credit
A consolidation loan with bad credit is possible from some lenders, but the rate will usually be higher, which can wipe out the saving. Before you borrow more, try the options that don't need a new loan:
- Ask each lender for a hardship variation. Under the National Credit Code you can ask orally or in writing, and the lender must respond within 21 days (or ask for more information first). A hardship arrangement doesn't lower your credit score.
- Call the National Debt Helpline on 1800 007 007 (9:30am to 4:30pm on weekdays). Financial counsellors are free and can negotiate with your creditors for you.
- For an essential purchase rather than a debt, a No Interest Loan lends up to $2,000 with no interest or fees. NILs can't be used to pay other debts.
- Watch for the warning signs of high-cost credit. Moneysmart says most payday lenders charge an establishment fee of 20% of the amount borrowed plus 4% a month; in its example, a $1,200 payday loan repaid over a year costs $2,016.
Does a consolidation loan hurt your credit?
Applying adds a credit enquiry to your report, which stays for five years, and several applications in a short time can lower your score. After that, the effect depends on what you do. Your report shows your repayment history for the last two years, so making every repayment on time on the new loan helps. Keeping the old cards open and running them up again is the most common way consolidation goes wrong, both for your score and your debt.
How to check whether consolidation will work for you
Moneysmart suggests working through it in writing:
- List every debt: balance, interest rate, fees (including early payout fees), remaining term and current repayment
- Get the new loan's rate, all fees, term, repayment and whether you can repay early without a penalty
- Compare the total cost, not the repayment: the calculator on this page does it for up to five debts, and the personal loan calculator prices the new loan
- Stress-test your budget for a rate rise, an income drop or higher living costs
- Decide in advance to close or cut the limits on the cards you pay off, and not to apply for new credit
Consolidating into your home loan
Adding personal debts to a mortgage usually gets the lowest rate, but spreads them over the remaining home loan term, often 20 years or more. $15,000 repaid over 25 years costs far more in interest than the same debt cleared in 3 to 5 years, even at a mortgage rate, unless you make extra repayments to clear that portion quickly. It also puts your home behind the debt. Moneysmart's advice is to consider every other option before using your home or car as security. Our home loans guide covers refinancing.
Debt firms to avoid
Since 1 July 2021, businesses that provide debt management or credit repair services for a fee must hold an Australian credit licence. Check any firm on ASIC's professional registers before you deal with it. Moneysmart says debt management firms can be expensive and lists warning signs of companies to avoid, including one that:
- isn't licensed
- asks you to sign blank documents
- refuses to discuss repayments or rushes the transaction
- won't put all loan costs and the interest rate in writing before you sign
- tries to arrange a business loan when all you need is a consumer loan
Debt relief offers: what's real
The formal ways to deal with debts you can't pay are set out in the Bankruptcy Act and run by the Australian Financial Security Authority (AFSA): temporary debt protection for 21 days, a debt agreement, a personal insolvency agreement and bankruptcy. Each is a serious legal step with long-term effects, including on your ability to get credit.
A debt agreement (also called a Part IX debt agreement) isn't a consolidation loan. You agree to pay your creditors a share of what you owe over time, generally up to three years (if you own your home you may be able to propose up to five), through a registered debt agreement administrator, and you're released from most unsecured debts when you finish. It stays on your credit report and on the National Personal Insolvency Index for five years or more, and proposing one is an act of bankruptcy: if your creditors reject it and you owe more than $10,000, they could apply to make you bankrupt.
Before you sign anything, talk to a free financial counsellor on 1800 007 007. If you go ahead, Moneysmart says to check the administrator is on AFSA's list of registered debt agreement administrators and that you know what they charge.
| You can't propose a debt agreement if | Limit |
|---|---|
| Your unsecured debts add up to more than | $155,773.80 |
| Your divisible property (what a trustee could sell if you were bankrupt) is worth more than | $311,547.60 |
| Your after-tax income for the next 12 months is more than | $116,830.35 |
| You've been bankrupt, or had a debt agreement or personal insolvency agreement, in the last | 10 years |
Free alternatives to try first
Ask your lenders for help. Under the National Credit Code you can ask for a hardship variation, orally or in writing, and the lender must respond within 21 days (or ask for more information first). A hardship arrangement doesn't affect your credit score, and the listing is removed after 12 months.
Talk to a financial counsellor. The National Debt Helpline (1800 007 007, 9:30am to 4:30pm on weekdays) is free and confidential, and counsellors can negotiate with creditors for you. Way Forward, a not-for-profit, can set up an affordable debt management plan for people in long-term hardship at no cost. A credit card balance transfer can also work, if you clear the balance before the promotional rate ends.
General information only. It doesn't take into account your objectives, financial situation or needs. Check the lender's key facts sheet, credit guide and TMD before you apply. We don't compare every lender, and we may earn a commission if you apply through our links.
What to watch for
- A lower repayment over a longer term can mean paying more in total.
- Turning unsecured debts into a loan secured on your home or car puts that asset at risk.
- Paying off cards and keeping them open invites the debt to come back. Close them or cut the limits.
- Check early payout fees on the debts you're clearing and establishment fees on the new loan.
- Only deal with a licensed debt management or credit repair firm; many charge for help you can get free.
Common questions
Is debt consolidation a good idea?
It can be, if the new loan's rate and fees are lower, the term is no longer than your existing debts, you can afford the repayment and you stop using the old credit. If any of those isn't true, it can cost more.
Does taking a consolidation loan hurt your credit?
The application adds an enquiry to your credit report for five years and can dip your score briefly. Repaying the new loan on time builds positive repayment history, which shows for two years. The damage usually comes from running up the old cards again.
How much will I pay monthly on a $50,000 debt consolidation loan?
About $1,050 a month over 5 years at 9.50%, or $817 over 7 years (with $5,639 more interest). Fees are extra. A loan this size may need security.
Can I consolidate debt with bad credit?
Possibly, but the rate will usually be higher, which can wipe out the saving. Before borrowing more, talk to a free financial counsellor on 1800 007 007 and ask your current lenders about hardship arrangements. See our guide to loans with bad credit.
How do you get out of debt when you're broke?
Start with free help, not new credit. Call the National Debt Helpline on 1800 007 007; a financial counsellor can work out a budget and negotiate with your creditors. Ask each lender for a hardship variation, which won't lower your credit score. If you're on Centrelink, an advance of part of your payment or a No Interest Loan for an essential purchase costs nothing in interest. Avoid payday loans, which charge high fees.
What's the worst debt you can have?
Debt with the highest cost relative to what you borrowed. Moneysmart says most payday lenders charge 20% of the amount borrowed upfront plus 4% a month, and credit card cash advances are charged interest from the day you withdraw, usually plus a fee. Missed payments also add default fees and can be listed on your credit report.
Who qualifies for debt forgiveness in Australia?
There's no general debt forgiveness scheme. Your options are a hardship arrangement with each lender (which can pause or reduce repayments), an informal arrangement negotiated by a financial counsellor, or the formal options run by AFSA: a debt agreement, a personal insolvency agreement or bankruptcy, each with serious long-term effects. Talk to a free financial counsellor first.
Who is eligible for debt relief in Australia?
The formal options run by AFSA each have their own rules. For a debt agreement you must be unable to pay your debts as they fall due, not have been bankrupt or had a debt or personal insolvency agreement in the last 10 years, and be under AFSA's limits: on 2 October 2026, unsecured debts of $155,773.80, divisible property of $311,547.60 and after-tax income of $116,830.35 for the next 12 months. Talk to a free financial counsellor on 1800 007 007 before you sign anything.
Free help
If repayments are getting hard, call the National Debt Helpline on 1800 007 007 (9:30am to 4:30pm on weekdays) for free, confidential financial counselling, or ask your lender's hardship team for help before you miss a payment. This page is general information, not financial advice.