Katie Douglass

Quality Checked

Related Topics

If you’re struggling to keep on top of multiple debts and interest rates, it might be worth considering debt consolidation.

However, debt consolidation isn’t something you should enter into lightly. If not done carefully, you could risk paying more in interest or fees than before, which may land you in further debt.

In this article, we give a rundown of consolidating your debt to help you decide whether it’s the right option for you and your financial situation.

What is debt consolidation?

Debt consolidation (also known as refinancing) involves combining multiple debts, including credit cards, existing loans, and other types of debt, into one personal loan.

For example, let’s say you have a credit card, car loan, and personal loan altogether. This means you are likely paying three different interest rates and three repayments at different times each month. Understandably, this could be overwhelming and difficult to manage.

By consolidating your debt, you’ll just have a single loan with one interest rate, one set of fees, and one repayment to worry about.

While you are still paying off the total amount of debt owed, refinancing can help you manage your repayments more easily and at a potentially lower interest rate.

Pros and cons of debt consolidation

To help give you an idea of whether debt consolidation might be suitable for you, we’ve put together the pros and cons:


  • Lower interest rate and fees: It can save you money as there can be less interest and/or fees to pay off. However, keep in mind that if you extend the term of your debt consolidation loan, you could end up paying more in interest overall.
  • Easier to manage repayments: Managing your debt becomes much easier if you only have to worry about one repayment schedule.
  • Know when you’ll be debt free: Because you only have one repayment schedule, you can get a better idea of when you’ll be debt free.


  • Risk damaging your credit score: Every time you apply for a loan or credit, including a debt consolidation loan, this will be recorded in your credit history. Plus, if you don’t keep up with the repayments on your new personal loan, it could hurt your credit score.
  • Pay more interest overall: If you extend the term of your loan, you could end up paying more interest overall (even if the monthly repayments are reduced).
  • Establishment fees: Since you will be taking out a new loan, you may be required to pay a new establishment fee.
  • End up with more debt: You can risk spending more and, as a result, accumulate more debt.

How to consolidate debt

The first step in consolidating your debt is to know which debts you have and how much you owe on each one. Go through any relevant statements and take note of how much you’re paying in interest and fees (especially exit fees). After you complete this, work out how much you can reasonably afford to pay off your debt each month. We recommend using Moneysmart’s free online budget planner to work out where your money is going.

After you work out how much debt you have and what you can reasonably afford to pay each month, there are a few options you can consider. These include combining your debts into one personal loan, a home loan top-up, or credit card balance transfer.

We break down each option below:

Debt consolidation loan

A debt consolidation loan is where all of your existing debts are combined into one personal loan. Ideally, you want to take out a personal loan with a lower interest rate than what you were previously paying.

One of the main benefits of a debt consolidation loan is that you repay it over a fixed term. This can give you a clear idea of when you are likely to be debt-free. In addition, you can take advantage of a lower interest rate compared to what you were paying on your existing debts.

Before you consider taking out a personal loan to consolidate your debt, make sure you:

  • Compare the interest rate, fees (e.g. application fees), and other costs of the new loan against your current debts;
  • Can afford the repayments on the new loan;
  • Calculate how much interest you are paying throughout the loan term (especially if you extend the term);
  • Check if you will incur any penalties for early repayments of your current debts.

Home loan top-up or refinancing

If you have a home loan (mortgage), you can consider topping up your loan or refinancing it into one big loan to consolidate your debt. One of the advantages of this option is that home loans generally come with a lower interest rate compared to other types of loans (e.g. personal loans, car loans).

Just as the same with a debt consolidation loan, you may end up paying more interest over the loan term even if your monthly repayments are smaller. This is because home loans typically come with a longer loan term (between 25 to 30 years) than other types of loans. If you decide to opt for a home loan top-up or refinance, make sure you are able to afford the repayments as you can risk losing your home if you fail to make payments.

Credit card balance transfer

A credit card balance transfer is where you move your credit card debt onto a new card, often with a lower interest rate. Typically, the new card will have a balance transfer offer where the interest rate is either very low or at 0% for a limited amount of time. This period of time is often between six months and two years. After the promotion ends, the interest rate can go up.

While you might be initially paying low or no interest on your balance transfer card, it’s important to understand that it can revert back to a higher rate, possibly even more than your original credit card. Make sure you’ll be able to afford the repayments after the balance transfer offer ends. Read through the terms and conditions and ensure that you understand what fees are included.

Other options to consider

Before you make any decisions about consolidating your debt, there are a few options you might want to consider first.

Talk to your loan or credit provider

If you are finding it difficult to manage your debts, it’s worth speaking to your loan or credit provider. By letting them know, they are often able to help you get back on track by extending your repayment schedule, lowering your interest, or pausing your payments for a certain period of time.

Seek free professional advice

Consider seeking advice from a professional financial adviser who can help go through the options to manage your debt. They can also help work out whether consolidating your debt is a good idea for your financial situation. Moneysmart has a list of financial counsellors you can reach out to.

Written by: Katie Douglass

Katie Douglass is the Senior Communications Manager at Jacaranda Finance. In recent years, Katie’s work has appeared in publications such as Marie Claire, InStyle, Oiyo, and THE ICONIC. She has a Bachelor of Creative Industries in Fashion Communication & Journalism from the Queensland University of Technology.