Pitfalls, Complaints and Free Help
Debt consolidation loans in Australia: when they save money and when they backfire
A worked example of consolidating credit cards and loans into one personal loan, the risks of longer terms, fees, reopened cards and home loan top-ups, and safer alternatives.
A debt consolidation loan replaces several debts — usually credit cards, store cards, buy now pay later and other personal loans — with a single personal loan. It saves money only if the new loan's total cost, including fees, is lower than the old debts' over the same period, and you stop using the old accounts. In the illustrative example below, consolidating $18,000 of debts averaging about 19.5% into a 12% loan over four years saves about $2,860 after fees. Stretch the new loan to seven years and total interest ends up higher than before; roll it into a 25-year home loan and interest more than doubles. Free financial counsellors can help you decide whether consolidation, a hardship arrangement or another option suits you.
This guide is part of personal loan mistakes to avoid. Figures are illustrative, not offers.
The starting position
| Debt | Balance | Rate (illustrative) |
|---|---|---|
| Credit card A | $10,000 | 20.99% |
| Existing personal loan | $5,000 | 16.5% |
| Credit card B | $3,000 | 19.99% |
| Total | $18,000 | weighted average about 19.5% |
Weighted average rate = (10,000 × 20.99 + 5,000 × 16.5 + 3,000 × 19.99) ÷ 18,000 ≈ 19.6%, rounded to 19.5% here for simplicity.
Scenario 1: consolidate over the same period — the saving case
Repaying $18,000 over four years:
| Keep existing debts | Consolidation loan at 12% | |
|---|---|---|
| Monthly repayment | about $543 | about $474 |
| Total interest over 4 years | about $8,062 | about $4,752 |
| Fees for new loan | – | $450 |
| Net saving | – | about $2,860 |
The monthly saving of about $69 recovers the $450 of fees in about seven months. Run your own figures in the debt consolidation calculator.
Scenario 2: stretch the term — the backfire case
The lender offers the same 12% loan over seven years, with a repayment of about $318.
| Keep existing debts (4 years) | Consolidate over 7 years | |
|---|---|---|
| Monthly repayment | about $543 | about $318 |
| Total interest | about $8,062 | about $8,691 |
| Plus fees | – | $450 |
The repayment falls by $225 a month, which feels like a big win, but total cost is about $1,080 higher and you are in debt for three extra years.
Scenario 3: roll it into the home loan
Adding $18,000 to a home loan at an illustrative 6.5% over the remaining 25 years:
- Repayment about $122 a month for that portion
- Total interest about $18,460, more than double scenario 1
The interest rate is lower, but the debt now lasts 25 years and is secured on your home. If you take this route, set extra repayments so the $18,000 is cleared within a few years.
The biggest risk: the cards fill up again
The most common consolidation failure is ending up with the new loan and new card balances. To avoid it:
- Close the consolidated card accounts, or at least cut the limits.
- Ask the new lender to pay the old creditors directly.
- Check final statements show zero balances and the accounts are closed.
- Build a small emergency buffer so the next unexpected bill does not go on a card.
Closing unused limits can also improve your borrowing capacity; see how much can I borrow.
Other risks to check
| Risk | What to check |
|---|---|
| Fees | Establishment fee, monthly fee and any early repayment fees on the debts you are paying out |
| Fixed-rate break costs | If the existing personal loan is fixed, ask for a payout figure |
| Secured over a car or home | Turning unsecured debt into secured debt puts the asset at risk |
| Variable rate | The saving shrinks if the rate rises; see fixed vs variable |
| Debt management firms | Some businesses charge large fees for "consolidation" or "debt agreements"; see below |
Be careful with "debt help" businesses
Some businesses advertise debt consolidation, credit repair or "debt solutions" for a fee. Some propose formal options such as a debt agreement under Part IX of the Bankruptcy Act 1966, which is an act of insolvency, stays on your credit report and is recorded on the National Personal Insolvency Index. Before signing with any paid service:
- talk to a free financial counsellor via the National Debt Helpline,
- check whether the business holds a credit licence where required,
- ask for all fees in writing.
Alternatives to a consolidation loan
- Hardship arrangements with each lender; see hardship notices.
- A balance transfer card with a low or zero introductory rate — useful only if you can clear the balance before the rate reverts and you do not spend on the card.
- Paying the highest-rate debt first while paying minimums on the rest.
- Negotiating a lower rate with your existing card provider.
Frequently asked questions
Will a consolidation loan improve my credit score?
It may, over time, if it reduces your number of accounts and you make every repayment on time. In the short term the application adds an enquiry and a new account.
Can I consolidate buy now pay later debts?
Often yes, though some lenders view regular BNPL use as a risk sign. Close BNPL accounts you consolidate. See buy now pay later rules.
Should I consolidate if I am behind on payments?
Get advice first. Lenders must not provide an unsuitable loan, and a new loan may not be approved or affordable. A hardship arrangement or financial counselling may be better.
Is it better to consolidate into my mortgage?
The rate is usually lower, but the term is much longer and the debt is secured on your home. Unless you make extra repayments, it can cost far more in total.
Sources and where to check
- ASIC Moneysmart — debt consolidation and refinancing
- National Debt Helpline — free financial counselling, 1800 007 007
- Australian Financial Security Authority — debt agreements and the National Personal Insolvency Index
- Australian Financial Complaints Authority — complaints about lenders and debt services
