Debt Consolidation Loan

Updated 12 Mar 2026Content was accurate at the time of publication

A debt consolidation loan (also called a consolidation loan) is a single personal loan used to pay out multiple existing unsecured debts—typically credit cards, store cards, payday loans and other personal loans—so you have one regular repayment instead of many. If you're looking to consolidate credit card debt, reduce overall interest or simplify repayments, this is a common option to consider.

What is a debt consolidation loan?

A debt consolidation loan is a personal loan taken to combine several unsecured debts into one loan. The main objectives are to simplify repayments, potentially lower the overall interest rate you pay, and improve cashflow by spreading repayments over a fixed schedule.

When you consolidate, lenders usually pay your existing creditors directly and you close or freeze those accounts. The consolidated balance becomes a new loan that you repay under one contract. That contract can be secured (backed by an asset) or unsecured (no asset security); each has different costs and risks. For overview reading on related loan types see Personal loan and Unsecured loan.

How debt consolidation loans work

A consolidation loan typically follows these steps:

You apply for a personal loan sized to cover the total of your existing debts.
The lender assesses your income, expenses and credit history.
If approved, the lender pays your creditors (or gives you the funds to do so).
Your existing accounts are closed or left with zero balances and one single loan remains.

Types of consolidation loans

Unsecured personal loan: No collateral required; interest rates are generally higher than secured loans but there is no risk to property or vehicle.

Secured consolidation loan: Uses an asset (home, car) as security; typically offers lower rates but creates a risk of repossession if you default.

Hybrid or line-based options: Some lenders offer lines of credit or redraw features that can be used for consolidation.

When comparing products, consider not only the headline interest rate but the comparison rate and loan features that affect flexibility such as early repayment, redraw or offset facilities. For plain-English definitions check Comparison rate.

Who should consider a debt consolidation loan?

Debt consolidation may be suitable if you:

Have multiple unsecured debts (credit cards, store accounts, payday loans).
Can get a lower interest rate on the consolidation loan than your current rates.
Want predictable monthly repayments and a clear pay-off date.
Prefer a structured repayment plan to avoid minimum-only credit card payments.

It may be less suitable if you:

Need to borrow longer than necessary (this can increase total interest).
Are tempted to run up new unsecured debt again after consolidation.
Have limited or poor credit such that the consolidation loan rate would be higher than some existing debts.

If you are rebuilding credit or in financial stress, see resources such as Credit score and Debt hardship.

Costs and features to compare

Key elements to compare:

Interest rate (annual): The advertised nominal rate.
Comparison rate: Shows the effective cost per year including most fees. See Comparison rate.
Establishment / application fees: One-off fees charged when the loan starts.
Ongoing fees: Monthly administration or account-keeping charges.
Early repayment fees: Penalties if you repay the loan early.
Late payment fees: Charges for missed or late repayments.
Loan term: Shorter terms cost less in interest but have higher monthly repayments.
Security: Secured loans may have lower rates but risk your asset.
Features: Offset accounts, redraw facilities, repayment frequency flexibility and repayment holidays.

Typical fee ranges (varies by lender):

Establishment: $1–$100
Monthly administration: $1–$15
Early payout: fixed fee or several months' interest (varies)
Late fee: $1–$10 per missed payment plus default interest

For impartial guidance on fees and product choice refer to ASIC MoneySmart: https://moneysmart.gov.au/borrowing-and-credit/debt-consolidation.

Fixed rate vs variable rate for consolidation

Fixed rate: Predictable monthly payments for the fixed term; good if you want certainty and protection from rate rises. Fixed loans can have higher break costs for early repayment.

Variable rate: Can move with the RBA cash rate and lenders' pricing; repayments may fall or rise. See RBA cash rate history: https://www.rba.gov.au/statistics/cash-rate/.

Choose based on your risk tolerance, budget buffer and planned loan term.

Example scenarios and calculator

Simple amortising loan math is used in these examples. A common repayment formula is:

M = P × [ r(1 + r)^n ] / [ (1 + r)^n − 1 ]

Where:

M = monthly repayment
P = principal (loan amount)
r = monthly interest rate (annual rate / 12)
n = total number of monthly payments

Examples use two scenarios consolidating $10,000 or $1,000 of credit card debt.

Example 1 — $10,000 credit cards at 19% vs consolidation at 10% over 5 years

Debt: $10,000 | Term: 60 months

If the revolving balance were repaid via an amortised loan at 19%:

Monthly repayment ≈ $118
Total repaid ≈ $11,104
Total interest ≈ $11,104

Consolidation loan at 10%:

Monthly repayment ≈ $125
Total repaid ≈ $15,500
Total interest ≈ $1,500

Interest saved ≈ $1,604 over 5 years; monthly cashflow improved by ≈ $13.

Example 2 — $1,000 debt at 20% vs consolidation at 8% over 3 years

Debt: $1,000 | Term: 36 months

Consolidation at 8%:

Monthly repayment ≈ $151
Total repaid ≈ $1,036
Total interest ≈ $1,036

This reduces both monthly cost and total interest versus high revolving card rates.

Use an online calculator to test your own numbers and produce an amortisation schedule. Enter total debt, proposed rate, term and fees to compare monthly repayment, total interest and total cost.

Alternatives to a consolidation loan

Common alternatives and when they may be preferable:

Balance transfer credit card

Pros: 0% promotional periods can eliminate interest short-term.

Cons: Transfer fees, high revert rate, limited amounts; risky if you cannot clear balances before promo ends.

Refinancing home loan / redraw

Pros: Lower interest if secured by mortgage.

Cons: Converts unsecured debt into secured debt and prolongs repayment; increased repossession risk.

Hardship arrangements with creditors

Pros: Can pause or reduce repayments without new debt.

Cons: Short-term relief only; may affect credit listings.

Formal insolvency (debt agreement, bankruptcy)

Pros: Final resolution in severe cases.

Cons: Major long-term credit and legal consequences; should be last resort.

Debt management services and counselling

Pros: Free independent advice via agencies such as the National Debt Helpline (https://ndh.org.au/).

Alternative	When better	When worse
Balance transfer card	Short-term promotional interest, disciplined repayment plan	Large balances, risk of revert rate
Home loan refinance/redraw	Low secured rates and ability to repay quickly	If you don't want to secure debt with property
Hardship arrangement	Temporary income shock	Long-term unaffordable debt
Debt agreement / bankruptcy	When debt is unmanageable	If you can reasonably repay with a consolidation plan

See Bankruptcy for formal options on debt resolution.

Eligibility and how to improve your chances

Typical eligibility requirements:

Proof of stable income (payslips, tax returns).
Identification (driver licence, passport).
Recent bank statements showing income and spending.
List of existing debts and balances.
Acceptable credit history (varies by lender).

Improve approval chances:

Reduce unsecured balances where possible.
Lower living expenses to improve serviceability.
Prepare documentation: recent payslips, full bank statements and proof of regular income.
Consider a co-borrower or a secured product (understand the associated risks).
See tips at Credit score.

How to compare lenders

Checklist for comparing lenders:

Headline interest rate and comparison rate
Establishment and ongoing fees
Permitted loan terms and repayment flexibility
Early repayment and discharge fees
Secured vs unsecured options
Customer support and complaints handling
Eligibility criteria and speed of funds

Sample comparison template:

Lender	Rate (p.a.)	Comparison Rate (p.a.)	Fees (est./ongoing)	Term range	Secured/Unsecured
Lender A (example)	8.95%	9.4%	$250 / $10 pm	1–7 years	Unsecured
Lender B (example)	6.75%	7.1%	$400 / $0	1–10 years	Asset-backed
Lender C (example)	11.5%	12.3%	$0 / $15 pm	1–5 years	Unsecured

For more information see our personal loans section.

How to apply — step by step

Collect documents: ID, payslips (last 3 months), bank statements (last 3 months), list of debts.
Use a repayment calculator to confirm affordability.
Request pre-approval or a conditional quote from shortlisted lenders.
Submit full application online or in-branch with supporting documents.
Lender conducts credit checks and verification; timelines commonly 24–72 hours for simple unsecured loans.
If approved, funds are used to pay creditors or deposited to you to pay them off; confirm which happens.
Close or freeze old accounts as agreed.

For lender comparisons and calculators, see our personal loans section.

Risks, common pitfalls and warnings

Longer terms raise total interest: Stretching a loan to lower monthly payments can increase the total interest you pay.
Secured loans put assets at risk: Securing the consolidation loan with property or a vehicle risks repossession if you default.
Closing accounts can affect credit mix: Closing old credit lines may shorten credit history or change credit utilisation—impacting your score temporarily.
Balance transfer traps: Promotional deals often have transfer fees and high revert rates. Missing payments can void introductory rates.
Scams and high-fee providers: Avoid offers that require large upfront fees or pressure you to act immediately.
Getting into worse debt: Consolidation removes current balances but doesn't stop future overspending. Establish budgeting controls to avoid repeating the problem.

If you are in financial distress, prioritise independent free advice via the National Debt Helpline or ASIC MoneySmart hardship resources.

FAQ

Is a debt consolidation loan bad for my credit?

Consolidation itself is neutral; it can reduce credit utilisation and make repayments easier. However, a credit application triggers a hard inquiry and closing old accounts can affect credit history. How you manage the new loan matters most.

Is interest on a consolidation loan tax deductible?

Interest on personal consolidation loans is generally not tax deductible unless the funds are used to produce assessable income (e.g., invest in a rental property). Check ATO guidance or consult a tax professional.

Can I consolidate debt with bad credit?

Options are more limited with poor credit. You may still access certain unsecured lenders or consider secured options, but rates will typically be higher. Seek free advice via the National Debt Helpline.

How quickly will consolidation pay off my debts?

A consolidation loan sets a fixed term. If you borrow for 5 years, you will repay over 5 years assuming on-time payments. Making extra repayments shortens the term and reduces interest (subject to early repayment terms).

What's the difference between secured and unsecured consolidation?

Secured consolidation is backed by an asset and usually has lower interest; unsecured has no asset security but higher rates. Secured loans risk loss of the asset on default.

What fees should I watch for?

Watch establishment fees, monthly account fees, early payout penalties and default fees. Compare the comparison rate rather than headline rate alone.

Should I consolidate if I want lower monthly payments?

Yes if the consolidation loan either lowers your rate or allows a longer term that reduces monthly payments. Be aware that longer terms increase total interest unless the rate reduction offsets that.

Can I consolidate if I'm behind on payments?

It can be harder to gain approval when you have recent defaults. Lenders will assess affordability and risk. Contact the National Debt Helpline for tailored options if you are in arrears.

Do I need to close credit cards after consolidating?

You don't always have to close cards, but reducing available credit utilisation is wise. Leaving cards open and not using them reduces utilisation but carries discipline risk.

Where can I get impartial advice?

Use ASIC MoneySmart and the National Debt Helpline for free guidance. If the decision is complex, consider independent financial advice.

Key takeaways

A debt consolidation loan can simplify your finances by combining multiple debts into a single repayment, potentially at a lower rate. However, you should compare the total cost including fees, consider whether a longer loan term might increase total interest, and explore alternatives like balance transfer cards or hardship arrangements before deciding. Free, impartial guidance is available from ASIC MoneySmart and the National Debt Helpline.