Compare debt consolidation, balance transfers and personal loans

Key points

• Debt consolidation, balance transfers and personal loans all solve different problems. Start from your problem, not from the product with the best ad.
• A balance transfer suits credit card debt you can clear inside a promotional window. A consolidation loan suits several ongoing balances. A personal loan refinance suits one expensive loan.
• A lower repayment or a 0% promotional period is not automatically a saving. Terms, fees and revert rates decide the total cost.
• For some situations, none of the three helps, and support is the better route.

Looking for the right loan product means wading through three different types of products that all promise roughly the same relief. Each has value, however they solve very different problems in different ways. The simplest way to get the right solution for your situation is to ignore the product names for a moment and start from the problem you're trying to solve, because they're built differently, and operate differently.

What each option actually does

A debt consolidation loan is a new personal loan that pays out several existing debts, leaving one repayment over a fixed term with a set end date. The old accounts can be closed. Its defining features are the fixed term, which guarantees an end point if you keep paying, and its reach, since it can absorb credit cards, personal loans and often Afterpay and Zip Pay balances in one consolidation.

A balance transfer moves credit card debt onto a new credit card that charges a low or 0% rate on the transferred amount for a limited period, usually between 6 and 24 months. It is the cheapest borrowing of the three during the window, however only works in your favour when you're committed to paying off the entire outstanding amount (including what you add to it during that time) before the window expires – when the promotion window ends, your outstanding amount is charged at the new credit card's revert rate, which is usually far higher. There is normally a one-off transfer fee calculated as a percentage of the amount moved, and new purchases on that credit card typically attract a separate, much higher purchase rate. Moneysmart's balance transfer guidance also recommends cancelling the old credit card, for reasons the credit-limits difference below makes obvious.

A personal loan, used on its own, replaces or funds one debt rather than sweeping several. As a refinance, it swaps one expensive loan for a cheaper one. The mechanics are the same as a debt consolidation, just for a single debt.

The five differences that decide it

What happens to your old debts. A consolidation loan and a refinance pay debts out and end them. A balance transfer moves the debt without ending it: the balance survives, sitting on a new credit card, still revolving, still yours to clear before a deadline.

Deadlines versus end dates. A loan gives you a fixed end date and removes the choice of drifting. A balance transfer gives you a deadline instead – beat it and the borrowing was nearly free, miss it and whatever balance is left meets the revert rate. Our members who chose transfers without a repayment plan sized to the window ended up exactly there, with the debt roughly back where it started and the transfer fee spent as well.

How the cost accrues. The loan options cost interest steadily across the term, so the term length drives the total. The transfer costs almost nothing during the promotion and everything after it, so the fraction you clear inside the window drives the total. Neither structure is cheaper in general – it depends which borrower you are.

Who sets the repayment. A loan contract sets a repayment that retires the debt by the end date, and the lender collects it whether motivation is high or low that month. A balance transfer asks only for the credit card's minimum repayment, which is nowhere near the amount needed to clear the balance inside the window. The repayment that makes the transfer work is one you have to impose on yourself, every month, with no contract holding you to it. If you know your discipline wobbles in a tight fortnight, preferring the enforced version is not pessimism, it is self-knowledge. A fixed-rate loan adds the further certainty that the repayment cannot move mid-plan, where variable-rate loans and revert rates can.

What happens to your credit limits. This is the difference members' experience speaks to most directly. A loan converts revolving credit into a closed account with no limit left behind, provided the old credit cards are actually closed. A balance transfer adds a credit card, and unless the old one is cancelled, you now hold two: one empty with its limit intact, one loaded with the transferred balance and a much higher purchase rate. Our members described paying credit cards down and reusing them when the next tight fortnight arrived. If that pattern is part of your history, the option that removes limits beats the option that multiplies them, almost regardless of the rate arithmetic.

Matching the option to the problem

The last two rows matter just as much as the products. If you cannot cover essentials, contact your credit providers' hardship teams and the National Debt Helpline on 1800 007 007 before applying for anything, because every one of these products is a new credit contract and none of them adds money to a budget that has run out. And if your debts are nearly done, finishing them as planned is allowed to be the answer.

Eligibility, honestly

All three options require a credit application, assessed on income, expenses, existing debts and credit history. The promotional balance-transfer offers tend to sit with the stricter issuers, and consolidation loans price across a wide rate range depending on your file. Under pressure, the offer with the strongest approval signal starts to look like the best offer, and our members told us about exactly that pull. It is worth resisting long enough to compare the price, because the easiest yes is often the most expensive one.

Whichever row of the table you land in, the next step is the same: model the option against your current path with the repayment and the total cost side by side, then decide whether it suits your broader situation. The WeMoney app can show your balances and repayments in one place once your accounts are connected, which makes that modelling faster. And when you get to comparing consolidation options, the app gives you personalised offers with an approval score, so you know your chances with no hard checks a lender can see.

Sources

• Moneysmart: Credit card balance transfers
• Moneysmart: Debt consolidation and refinancing
• Moneysmart: Personal loans
• Moneysmart: Urgent help with money

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.