What is debt consolidation? How it works in Australia

Debt consolidation means combining two or more debts (credit cards, personal loans, Afterpay or Zip balances) into one new loan, so you're left with one repayment at one rate.

If you're juggling four or five repayments a month (each with its own rate, due date and minimum), consolidating replaces the lot with a single repayment on a single day and a single end date. You still owe the same amount. It's just owed in one place, and the interest you pay from there depends on the rate and term you land. This guide covers what the term actually means, how the process works step by step, the different ways to consolidate debts in Australia, and how to tell whether it could be the right move for your situation.

What does "debt consolidation" actually mean?

"Consolidate" is just the formal word for combine. So "debt consolidation", "consolidating your debts" and "rolling your debts into one" all describe the same thing: taking out one new loan, using it to pay out the debts you already have, and then repaying the new loan instead of the old ones.

It helps to separate it from the terms it gets mixed up with:

• A debt consolidation loan is the loan that does the combining. In Australia it's usually a personal loan taken out for the total of the debts you're rolling together.
• Refinancing means moving a single existing debt to a better deal. Consolidation does the same job across several debts at once.
• Debt relief and debt agreements are something else entirely. Consolidation is ordinary borrowing. You still owe the full amount, just to one lender instead of several. A debt agreement, where your creditors formally agree to accept less than you owe, is an insolvency option with serious, long-lasting consequences (the FAQs below cover the difference).

How does debt consolidation work?

Below is the process from start to finish. It works the same regardless of which lender you use.

1. Add up what you owe. List every debt you'd want to consolidate, with its balance, rate and repayment. The total is what the new loan needs to cover, and the rates are what it needs to beat.
2. Apply for a new loan for that total. Each lender has its own criteria, and you may qualify subject to the lender's assessment of your income, expenses and credit file.
3. The old debts get paid out. Some lenders pay your old accounts directly, others put the money in your account and you pay them out yourself. Either way, make sure every balance has actually gone to zero. Here's what happens to old debts after consolidation.
4. The old accounts get closed. For credit cards this part is your call, however an open limit with no specific purpose is how balances build back up. We've covered keeping balances from building back up.
5. You repay the new loan. One repayment, one rate, one end date.

Step 1 is the slow part if you're doing it by hand across five statements and five logins. A faster way is connecting your accounts in WeMoney, it's free and you can see your debts, balances and repayments in one place.

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What are the types of debt consolidation?

There are three main ways to consolidate debts in Australia, and they suit quite different situations.

• A debt consolidation loan, a personal loan that pays out your credit cards, loans and "buy now pay later" balances. It's the most common of the three, and the one this guide describes. Comparing the loans themselves (rates, fees, terms, and who offers them) has its own guide: debt consolidation loans in Australia.
• A balance transfer credit card moves card balances onto a new card with a low or 0% promotional rate for a set window. It only works in your favour when you're committed to paying off the entire balance before the window expires (the rate it reverts to afterwards is generally much higher).
• Consolidating into your home loan. If you own a home, some lenders will let you roll other debts into your mortgage. The rate is usually the lowest of the three, however the term is the longest, and a debt stretched over 25 years can cost far more in total than it would on a shorter loan. The trade-offs deserve their own comparison before you commit.

If you're weighing these against each other, we've compared debt consolidation, balance transfers and personal loans side by side.

Does debt consolidation actually save you money?

It can, however it's not automatic (it depends on the rate, the fees and the term of the loan you accept). Below is what consolidation looks like with numbers on it:

Illustrative example at assumed rates. Not an offer, quote or advertised rate.

The saving comes from the gap between the new rate and the old ones, however the fees on the new loan and the term you choose can both work against it. The term is the one that can catch you out: a longer term lowers the monthly repayment, however you're paying interest for longer, so the new loan can cost you more in total than your old debts would have, even at a lower rate. So, when you compare, read the "comparison rate" (it folds most fees into a single percentage, and it's required by law to be shown wherever a rate is advertised for this kind of loan) and the total amount you'd repay, not the monthly repayment on its own.

The full working-out for your own debts (the rate a new loan has to beat, and whether the fees make sense) has its own guide: how much consolidation could cost or save.

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Is debt consolidation a good idea?

Sometimes, it helps when the problem is too many repayments at rates that are costing you, and you can get a new loan that beats them. It's also completely fine to skip it: if your debts are small and nearly paid off, the fees may be bigger than any saving, and paying them down where they are may be the better move. Some people consolidate knowing the total cost will be about the same, because a single repayment and a known end date is what they're after. That's a fair trade when you make it deliberately.

The full pros, cons and risks are worked through in is debt consolidation a good idea.

If you want a sense of your options before deciding anything, WeMoney isn't a lender. It's a money management app with a matching service (BrightMatch) that shows you lenders from our panel whose criteria you may fit, before any application is made. You may qualify subject to the lender's own assessment.

Pro tip: BrightMatch uses soft checks only, so there's no damage to your credit file, and no hard checks a lender can see.

When consolidation isn't the answer

If you're already behind on repayments, or the repayments themselves are more than you can afford, a new loan is rarely the right first move. Your existing lenders have hardship teams whose job is to work out a change to your repayments with you, and the National Debt Helpline on 1800 007 007 is free, independent and confidential. The financial counsellors there do exactly this work every day.

Key points

• Debt consolidation means combining two or more debts into one new loan (one repayment, one rate, one end date). You still owe the full amount, just in one place.
• The three main ways to consolidate debts in Australia are a debt consolidation personal loan, a balance transfer credit card, and consolidating into your home loan. Each suits a different situation.
• Whether consolidating saves money depends on the rate, the fees and the term of the new loan. A longer term lowers the repayment, however it can cost you more in total.
• Compare any loans on the comparison rate and the total amount repaid, not the monthly repayment on its own.
• If repayments are already unmanageable, lender hardship teams and the National Debt Helpline (1800 007 007) come before any new loan.

This article is general information only. It doesn't take your circumstances into account.

Sources

• Moneysmart: Debt consolidation and refinancing
• Moneysmart: Personal loans
• Moneysmart: Bankruptcy and debt agreements
• National Debt Helpline