Whether it's a car loan, credit card or personal loan, most people at some point use credit products. It's common to have multiple credit products at the same time, and all too easy for these debts to start to become overwhelming. People in this position often turn to debt consolidation loans to manage their repayments and remove the complications that come from juggling several debts at once.
What is a debt consolidation loan?
A debt consolidation loan means combining all of your outstanding debts (credit card bill, car loan, personal loan etc) into a single personal loan so you only have one repayment to manage. You take out a new personal loan that covers the total amount you owe, then use it to pay off your existing debts. This means you only have a single loan to repay, which can be easier to manage than having multiple creditors.
Say you've got a $30,000 car loan, a $10,000 personal loan and a $5,000 credit card bill. A debt consolidation loan would mean borrowing $45,000 in a new loan, paying everything off, then just making repayments on the new loan.
Advantages of debt consolidation loans
- Consolidating all your debts into a single loan can be easier to manage since you only have one monthly repayment to worry about.
- If you're paying account keeping fees on multiple products, you can reduce to just one with a debt consolidation loan.
- Personal loans tend to have lower interest rates than products like credit cards, meaning you may pay less interest overall.
According to RBA data, in December 2025 the average interest rate on outstanding credit card balances was 18.58% p.a., compared to 8.52% p.a. on fixed term personal loans.
Downsides to debt consolidation loans
- You may be charged break costs for paying off your existing loans early
- You might end up stretching smaller debts over a longer term, which can mean higher interest costs overall
Is a debt consolidation loan a good idea?
Whether a debt consolidation loan leaves you better off depends on your circumstances and the specific products involved. If you're refinancing several debts into one personal loan with a lower rate than all of them, it might be a no brainer, while it might be more complicated in other circumstances. You might need to sit down and crunch the numbers to see if you end up ahead:
Example:
Say you've got a five year car loan that you owe $20,000 on that you're paying 6% p.a.. on and credit card debt of $5,000 that you're paying 22% p.a. on. Is it worth consolidating these debts into a five year personal loan at 8% p.a.? To work this out, you actually need to work out your repayments - here's what that looks like (assuming you're repaying $200 per month on the credit card and excluding fees):
Debt consolidation loan No consolidation loan Minimum monthly repayments $507 $387 on the car loan, $200 each month on the credit card Total interest bill $5,415 $4,679 ($3,199 + $1,480 on the credit card) Worked out using the personal loan calculator and credit card repayment calculator from Moneysmart.Gov and the Savings.com.au car loan calculator. Doesn't take fees into account.
In the above instance, you'd be better off not doing the debt consolidation loan.
Finding the best debt consolidation loan
If you're considering consolidating your debts into a single loan, there are a few things to consider when selecting a suitable product:
- The interest rate: Paying less interest overall should be your priority. The lower your rate, the less you'll pay and the quicker you'll be able to pay the loan off, so it's well worth it to shop around to try to find the lowest rate you can.
- The fees: Some personal loan products have low rates, but make their money on application and 'account keeping' fees. It's no use paying a nominally lower rate if there's also a $500 fee baked into your new loan. If the comparison rate on a loan product is much higher than the advertised rate it's a telltale sign there are hefty fees.
- Eligibility: If you're struggling with your debts to the extent that you've started to miss some repayments, your credit score might have taken a hit. This might put some lenders off, so if this is you you might need to explore lenders that specialise in low credit borrowers.
Bad credit debt consolidation loans
Some personal loan lenders specialise in loans for borrowers with a poor credit history that would put off the major banks. Bad credit debt consolidation lenders typically have a more stringent assessment process, taking into account factors beyond your credit score to assess whether you'll be able to pay them back. However, this products often have higher rates and fees to compensate for the extra risk, so it's doubly important to work out whether you'll still end up ahead.
Other ways to consolidate your debt
Besides consolidating your debt through a personal loan, there are a couple of other common debt consolidation strategies:
Credit card balance transfer
If you have credit card debt across several cards, you can combine the debts onto a single card using a balance transfer.
Under this method, your credit card debts will be moved onto one card with a temporarily lower interest rate, sometimes even a 0% interest rate, which normally lasts for up to about two years. If you don’t pay off your debts in this time though, any debt that hasn’t been paid off is charged at a revert rate, which tends to be higher than most credit card interest rates.
Consolidating debt into your home loan
Another popular strategy is rolling all your debts into your mortgage, since home loans usually have much lower interest rates than personal loans or credit cards. However, if you roll your debts into a 20 or 30 year mortgage and keep only making your minimum home loan repayments, you may end up paying far more interest over time despite the rate being lower, since you're effectively accruing interest for your entire home loan term. If you choose this approach, it’s important to overpay on your mortgage by at least what you were paying on your previous debts.
Savings.com.au's two cents
For some people, debt consolidation loans are a good debt management strategy in the short term. However, if you don't address why your debts became so overwhelming in the first place, before too long you might end up back in the same predicament. If you can avoid going into debt (taking out personal loans or getting a credit card), you'll probably be better off - it sounds trite but only spending money that you have really is great advice.
If you're really struggling with your debts, you can call the National Debt Helpline on 1800 007 007 for free and confidential help. You could also call Way Forward on 1300 045 502, who can arrange debt repayment plans on your behalf, also for free.