Should I consolidate my debt?

Key points

• Consolidation is one possible response to a debt problem, not the default answer. Self-repayment, refinancing one loan, hardship support or deliberately changing nothing can each be the better move.
• The decision turns on what you are trying to fix: too many repayments to manage, too much total cost, or both.
• A lower repayment is not automatically a saving. Check the term, the fees and the total amount repaid, not just the monthly figure.
• If you cannot cover essentials, hardship support comes before any consolidation decision.

The question rarely arises naturally, it usually comes up when you've got a stack of repayments that never seem to shrink, a payment shows up you didn't expect, or a life event pushes the stress levels into the red. In our interviews with WeMoney members, people were often less worried about picking between different loan products, or even talking to a big bank – they wanted to know what the safe next step even looked like. Some had been sitting on the decision for months, not because they lacked options but because they could not tell which option they would regret.

This guide turns "should I consolidate" into a sequence of checks you can use to help make a better decision for you. We're not here to tell you that consolidation is right for you, because for plenty of people it is not.

What problem are you actually trying to solve?

Debt consolidation replaces several debts with one new loan and one repayment. That single change can fix two very different problems, and knowing which one you have can meaningfully shape your decision.

The first problem is manageability. If you're paying off several debts with different due dates, different minimum amounts on different cadences, that's a heavy mental load itself, let alone the cost. Our members described moving money between accounts to keep direct debits funded and checking several apps just to reconstruct where they stood.

The other problem is cost. High interest rates, especially on credit cards, can mean repayments mostly service interest while balances creep down. If this is your main problem, consolidation can help when the new loan's rate, fees and term reduce the total amount you will repay.

Many people can have both problems at once – the reason you should consider them separately is because a consolidation loan can solve the first while worsening the second, and the repayment amount alone will not tell you which is happening.

When does consolidation tend to help?

Consolidation is a reliable option to consider where you experience one or more of the following:

• Several of your debts carry high rates, typically credit cards or high-rate personal loans, and a consolidation loan would run at a meaningfully lower rate.
• Your income can service a sensible repayment. Consolidation reorganises debt for people who can pay, it does not create repayment capacity that is not there.
• The new term is similar to or shorter than the time your current path would take. Matching the term to your current payoff horizon protects most of the interest saving.
• The repayment cadence suits your pay cycle. Members told us weekly deductions could strain a budget that would have absorbed the same total monthly, so a loan that lets repayments land just after payday, at your pay frequency, is worth preferring.
• You have a plan for the old credit limits. Paid-out credit cards that stay open are how consolidated debt grows back.

Eligibility is still something that a lender will assess you for, because a consolidation loan is a credit application, assessed on income, expenses, existing debts and credit history, and approval at an attractive rate is never guaranteed. If your credit history is bruised, it is worth understanding what that means for pricing and approval before applying, because repeated applications in a short window compound the damage and the stress. This is where WeMoney can make things really simple: by connecting your accounts we can help you see your full financial picture, and give you an approval score that predicts the likelihood of a successful loan outcome – it's great for knowing your chances before any lender leaves a mark on your credit file when you apply.

When does it tend to make things worse?

The unfavourable cases are just as important to consider:

Stretching the term is the big one. Moving $15,000 of credit card debt onto a five-year loan can drop the repayment substantially, however the longer runway ends up taking back most of the interest saving.

The other failure mode is behavioural rather than mathematical. Consolidation does not change the income pressure, irregular bills or spending patterns that built up the debt in the first place. Several members we interviewed had consolidated, kept the old credit cards open, and met a shortfall or an emergency which resulted in them turning back to what they knew previously, leaving them with a new loan plus regrown credit card debt.

One caution that sits outside the numbers: deal only with licensed credit providers. Moneysmart warns just how important it is to avoid operators promising to make debt disappear, and anyone offering certainty about debt is selling something other than a loan. That's why WeMoney only works with Australian institutions that put members first, like we do.

The things to think about

Work through these questions with your circumstances in mind:

1. Can you cover essentials and minimum repayments? If rent, food, power or minimums are being missed, contact your providers' hardship teams and the National Debt Helpline before considering any new credit. Stop here until essentials are stable.
2. Is the pain concentrated in one expensive debt? If one loan carries the problem rate, assess refinancing that loan alone.
3. Are several debts expensive or hard to manage? This is where consolidation is the easiest solution. Model a consolidation loan against your debts with the term matched to your existing payoff horizon, then look at what a longer term does to the repayment and the total, and a shorter one to see all your options.
4. Is the balance mostly on credit cards, and could you clear it within a promotional period? Compare a balance transfer against the consolidation scenario before deciding.
5. Are your debts affordable and on track? Choose a repayment order, consider small extra repayments, and skip consolidation on purpose.

Whatever branch you land on, working your own balances, rates, fees and terms through a proper comparison, with the repayment and the total cost shown side by side, is the step that will help you decide which option works best.

If you want help assembling that picture, the WeMoney app shows your debts, balances and repayments in one place once your accounts are connected. Should you choose to compare consolidation options through our app, you'll see loan options personalised to you, and an approval score to give you the confidence before applying.

Sources

• Moneysmart: Debt consolidation and refinancing
• 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.