Debt Consolidation Australia — How It Works and When to Use It
This article provides general information only and does not constitute financial advice. For advice tailored to your situation, consult a licensed financial adviser. Learn more.
Contents
Debt consolidation combines multiple debts into a single loan or credit facility, ideally at a lower interest rate. Done correctly, it can reduce your total interest bill and simplify repayments. Done poorly — by extending the loan term without addressing spending habits — it can cost more in the long run.
How Debt Consolidation Works
Instead of managing multiple debts (each with their own interest rates, due dates, and minimum repayments), you take out a single loan to pay them all off and then make one repayment.
Example:
Before consolidation:
- Credit card A: $4,000 at 20% p.a.
- Credit card B: $3,000 at 19% p.a.
- BNPL: $1,500 at 0% (but with late fees risk)
- Personal loan: $5,000 at 14% p.a.
After consolidation:
- Personal loan: $13,500 at 9% p.a. (36-month term) → ~$429/month
The saving comes from the lower rate, provided you pay the loan off within the term and don’t re-accumulate debt on the cards.
Options for Debt Consolidation in Australia
1. Balance Transfer Credit Card
A balance transfer moves your existing credit card debt to a new card with a 0% interest introductory period — typically 12–24 months.
How it works:
- Apply for a balance transfer card
- Request that your existing card balance(s) be moved to the new card
- Pay no interest during the introductory period (some cards charge a transfer fee of 1–3%)
- Any remaining balance after the introductory period reverts to the card’s standard rate (often 19–22%)
Best for: People with credit card debt who are confident they can repay within the introductory period.
Watch out for: Continuing to use the old card after transfer; the revert rate after the promo period.
2. Personal Loan
A personal loan at a rate lower than your current debts can be used to pay them all off.
- Rates for unsecured personal loans in Australia typically range from ~6–20% p.a., depending on credit history
- Fixed repayments over a set term (1–7 years)
- Predictable repayments make budgeting easier
Best for: People with a mix of debt types (credit cards, BNPL, personal loans) who want a structured repayment plan.
Watch out for: Extending the loan term too long — a 7-year personal loan at 9% may actually cost more in total than a 2-year loan at 14%.
3. Mortgage Redraw / Refinance (for homeowners)
Homeowners sometimes roll personal debt into their mortgage, which typically has the lowest rate.
- Reduces the interest rate on the consolidated debt significantly
- But: the mortgage term is typically 25–30 years — short-term debt becomes very long-term debt
- Total interest paid may be far higher unless you make additional repayments
Best for: Homeowners with significant high-interest debt and the discipline to pay above the minimum.
Caution: Turning unsecured debt into secured debt (backed by your home) increases risk. If you fail to make repayments, your home is at risk.
When Debt Consolidation Makes Sense
| ✅ Good reasons to consolidate | ❌ Not a good reason |
|---|---|
| You have multiple high-interest debts at >15% | You want to avoid making repayments |
| You can get a significantly lower rate | You intend to keep using the credit cards you’re paying off |
| You are committed to paying off the consolidated loan | You are consolidating to extend the term and reduce monthly payments only |
| Simplified repayments will help you stay on track |
The Risk: Re-accumulating Debt
The most common failure with debt consolidation is not cancelling or locking away the credit cards that have been paid off. After consolidation, those cards have a zero balance — and many people re-accumulate debt on them, leaving them worse off with both a consolidation loan and new card debt.
After consolidating:
- Cancel cards you do not need
- Reduce limits on cards you keep
- Build an emergency fund so you don’t need to reach for a card when something goes wrong
FAQ
Will debt consolidation affect my credit score? Applying for a new loan creates a hard enquiry on your credit report, which may temporarily reduce your score. Over time, paying down debt and reducing credit utilisation generally improves your score.
Should I use a debt consolidation company? Many “debt consolidation” companies charge high fees or commissions. Most Australians can consolidate debt directly through their bank or a competitor — compare personal loan rates from banks and credit unions before using an intermediary service. Free financial counselling is available via the National Debt Helpline (1800 007 007).
Is debt consolidation the same as debt settlement? No. Debt consolidation is taking out a new loan to pay existing debts. Debt settlement (or debt agreements) involves negotiating to pay less than you owe — this has significant credit report impacts and consequences.
See also: How to Get Out of Debt | Debt Snowball vs Avalanche | Credit Score Australia
For advice tailored to your situation, speak with a licensed financial adviser or free financial counsellor. Free financial counselling is available via the National Debt Helpline (1800 007 007).