Debt consolidation loans: when they help and when they cost more
A debt consolidation loan rolls several debts, such as credit cards, store cards, buy now pay later and personal loans, into one new loan with one repayment. 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.
This guide shows the maths, including how a lower rate over a longer term can cost you more, explains the effect on your credit report, lists the warning signs of debt firms to avoid, and sets out the free help available before you borrow more.
By Better Rate Mate Editorial Team · Last reviewed
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 20.99% (August 2026). Clearing it in 3 years takes $565 a month and $5,342 in interest. A consolidation loan at 9.40% over the same 3 years saves about $3,069. Stretch the loan to 7 years and the repayment falls to $244, but the interest rises to $5,529, 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 20.99%, cleared in 3 years | $565 | $5,342 |
| Consolidation loan at 9.40%, 3 years | $480 | $2,273 |
| Consolidation loan at 9.40%, 5 years | $314 | $3,858 |
| Consolidation loan at 9.40%, 7 years | $244 | $5,529 |
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: use the personal loan calculator to price 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
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.
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
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.
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.
How much will I pay monthly on a $50,000 debt consolidation loan?
About $1,048 a month over 5 years at 9.40%, or $815 over 7 years (with $5,571 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 I pay off $30,000 in debt in one year?
You'd need to repay about $2,500 a month plus interest; at 9.40% a one-year loan of $30,000 costs about $2,629 a month. For most budgets that means combining a spending cut, extra income and a lower rate. A financial counsellor can help you build a realistic plan for free.
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.
