Compare debt consolidation loans in Australia

What is a debt consolidation loan?

A debt consolidation personal loan is simply a personal loan used to consolidate debts–that is, to combine multiple debts, like outstanding credit cards, or other loans, into one loan.

Debt consolidation is designed to make it easier to manage repayments. Plus, if you take out a personal loan with a lower interest rate and fees than what you’re currently paying, you may even save some money. 

Keep in mind that debt consolidation is different to refinancing. Refinancing sees you swap one loan for another to get a better interest rate, features, or benefits. Debt consolidation means to pay off multiple small loans at once by taking out a larger loan, then repaying the new loan over time.

How does a debt consolidation loan work?

Once you’ve been approved for a debt consolidation personal loan, you use the new money you’ve borrowed to pay off your old debts, effectively swapping these previous debts for the new loan. They generally allow you to borrow from $2,000 to $100,000, depending on the lender and your situation.

Interest rates on debt consolidation loans are typically lower than those on other forms of debt, like credit cards. This means it can be better to consolidate all of your debts into one personal loan rather than into another debt consolidation product, such as a balance transfer credit card.

Unlike a credit card or line of credit, a personal loan has a fixed loan term, usually between one and seven years. Assuming you make all your scheduled repayments, by the end of this term, you’ll have repaid your loan principal in full, plus interest. You may also pay fees such as upfront, ongoing, or missed or late payment fees. 

Your debt consolidation loan may have a fixed or variable interest rate. The interest rate and repayments on a fixed rate loan will stay the same for the full loan term, which can make budgeting simpler. The interest rate on a variable rate personal loan could rise or fall during your loan term, which can affect your repayments and make budgeting trickier, but these loans are more likely to offer extra flexibility, such as the ability to make extra repayments. 

Making extra repayments on your loan could help you clear your debt faster and save you on interest over the long term. Keep in mind that some lenders charge fees for making extra repayments or exiting the loan early. 

Are debt consolidation loans a good idea?

If you're struggling to manage debt, a debt consolidation loan may help you take control of your finances. But consolidating debt won’t be the best choice for every Australian–consider your financial situation and personal goals before you apply. 

As with any loan, there are pros and cons to taking out a personal loan for debt consolidation in Australia. 

There are several possible benefits, such as:

• After consolidating debt, you’ll only have to make one regular repayment, which may make your debt easier to manage
• You may be able to save on interest charges by getting a personal loan with a lower interest rate than your existing debts
• You’ll have a clear timeline for when you can be debt-free (provided you make your repayments, pay any additional fees on time, and don’t borrow anymore in the meantime)

Some potential risks and drawbacks of debt consolidation personal loans include: 

• If you struggle to meet repayments on the  new loan, you could end up accumulating more debt through interest and fees 
• You may need to pay extra fees, such as upfront and ongoing fees for the new loan, as well as penalties for paying off your old loans early
• Repaying debts over a longer loan term can actually cost you more in interest, even if the rate is lower

If you’re finding it difficult to manage your credit card repayments or other debt, consider contacting your lender or credit card provider about their financial hardship options before you apply for a debt consolidation loan. 

You might also want to seek advice from a financial counsellor. Financial counsellors offer free, independent and confidential advice. You can speak to one through the National Debt Helpline on 1800 007 007.

How can I compare debt consolidation loans?

It’s worth comparing debt consolidation loans before applying to make sure the loan you choose is the best fit for your financial situation and personal goals. 

For any loan you’re considering, it’s worth looking at:

• the interest rate (and whether it’s fixed or variable) 
• the fees
• the loan term 
• the features available (like the ability to make extra repayments without paying a fee) 

Before applying, you should also confirm that the loan can be used for debt consolidation purposes with the provider.

It’s also worth looking at a loan’s eligibility criteria to make sure you qualify. For example, some lenders may only offer debt consolidation personal loans to borrowers with good credit scores, as this indicates that they’re less likely to default on the repayments. 

If your credit score is not as high as you would like, you can take steps to help improve it, such as paying your existing repayments on time and checking your credit report for inaccuracies. 

How to apply for a debt consolidation loan

Before you apply for a debt consolidation loan, you should add up your existing debts. Look at how much you owe, the rates of interest being charged, and any other fees and charges that apply. Then, look at the potential cost of a personal loan and compare it to the cost of your current debts to see if you can get a better deal, or at least simplify your repayments. 

You can generally apply for a debt consolidation loan using your chosen lender’s website, over the phone, or in person at a branch. But before you apply, it’s important to research and compare your options to find the right solution for your needs. You should also check if you can fulfil a loan’s eligibility requirements before submitting an application.

Once you’ve chosen a debt consolidation personal loan and decided to apply, you’ll need to prepare documentation for your application, such as: 

• photo ID
• proof of income
• details of any existing debts and monthly expenses

The lender will use this information to decide if the loan suits your financial situation, as per Australia’s responsible lending laws. 

If your application is approved, the lender will either send the sum to your account or take care of paying your other creditors on your behalf. Once your other debts have been cleared and any fees paid, you can begin making your scheduled repayments. 

Keep in mind that making multiple credit applications over a short time can hurt your credit score. Take your time when assessing your loan options and only apply once you’re confident with your decision. 

You should also read all relevant documentation, such as the Product Disclosure Statement (PDS) and Target Market Determination (TMD), for any loan you’re considering. It may also be worth getting independent financial advice before making a decision.

How can I find the best debt consolidation loans in Australia?

The best debt consolidation loan for you will ultimately depend on your financial situation and personal needs.

Canstar’s Personal Loan Awards, which recognise lenders offering outstanding value to consumers, based on both price and features, could be a good place to start your hunt.

When comparing debt consolidation products, take the time to consider: 

• The interest rate
• The loan term
• If any fees will be charged

If you’re looking for a debt consolidation loan with a fixed term and interest rate, you may be interested in a fixed-rate personal loan, whereas if you want flexibility in how you repay the loan, you can generally find this in a variable-rate personal loan.