Personal loans for debt consolidation

TAMIKA SEETO
Finance Journalist · 1 September 2021
If you are juggling multiple debts, one option is to combine them into a single personal loan.

A debt consolidation loan could make it easier for you to manage your repayments. However, it’s important to tread carefully and make sure the new loan doesn’t end up costing you more than you’re already paying in interest and fees.


In this article:


What is a debt consolidation loan?

A debt consolidation loan combines some or all of your existing debts (including any credit card debt and other loan products you have) into one personal loan. The aim is generally to make it easier to manage your repayments. If you take out a personal loan with a lower interest rate and fees than what you’re paying on your existing products, this could also help to reduce your overall debt.

Are debt consolidation loans a good idea?

A debt consolidation loan can have several possible benefits, such as:

  • You 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.
  • Personal loans are repaid over a fixed term, so you have a clear timeline for when you can be debt-free (provided you make your repayments and pay any additional fees on time).

However, if the loan is more expensive than your existing debts, then you could end up accumulating more debt through interest and fees. It’s important to compare the interest rate and fees of any new loan you’re considering against your current debts. According to regulator ASIC’s Moneysmart website, the fees you are charged could include upfront and ongoing fees for the new loan, as well as penalties for paying off your old loans early.

You should also look at the term of the new loan and work out how much you would end up paying over the life of the loan. Generally, the longer the term, the lower your regular repayments would be, but the more you would pay in total.

If you are finding it difficult to manage your credit card repayments or other debt, you can also contact your lender or credit card provider to see what your options are. 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 a good idea to compare debt consolidation loans before committing to one, because the cost can vary significantly depending on the provider. For any loan you’re considering, take note of the interest rate (including whether it is fixed or variable), the fees, the loan term and the features available (like the ability to make extra repayments without paying a fee).

To give you an idea of the costs that may be involved, Canstar has analysed the average interest rates and fees on its database for an unsecured personal loan. The majority of providers charged an upfront loan fee (84%), but fewer than half charged an ongoing annual fee (38%). We’ve also looked at the average cost of a 5-Star Rated unsecured personal loan to show you how much you could save.
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5-Star Rated product average Database average Difference
Interest rate 7.05% 11.38% 4.33%
Upfront fee* $60 $192 $132
Ongoing annual fee* $5 $31 $26

Source: www.canstar.com.au – 25/08/2021. Based on products rated in the Unsecured Personal Loan profile of the Canstar Personal Loan Star Ratings (October 2020). Average interest rate calculations use the midpoint of the rate range, where applicable. Total cost includes total interest paid plus any applicable fees, which are assumed to be paid separately and not added to the loan balance. *Average calculations for fees based on all applicable products, including those that don’t charge a fee.

Eligibility and the interest rate you are offered may be subject to your credit score and other financial circumstances. For example, some lenders offer better interest rates to borrowers with good credit scores. If your score is not as high as you would like, there are steps you can take to help improve it.

If you are looking to compare personal loans, the following table shows a selection of loans from various providers on our database that offer unsecured personal loans (meaning they do not require an asset as security). Before applying, confirm with the provider whether the loan can be used for debt consolidation purposes.

The table below displays some of our referral partners’ unsecured personal loan products for a three-year loan amount of $20,000 in NSW. The products are sorted by Star Rating (highest to lowest) followed by comparison rate (lowest to highest). Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals. Read the Comparison Rate Warning.

How does a debt consolidation loan compare to a credit card?

The difference between paying off multiple credit cards with debt or one personal loan can be significant. The difference can be particularly costly if you only make the minimum repayments on your credit cards in order to avoid late payment fees, since this may also mean you are only paying interest on the remaining balance, while not making much ground on paying down the amount owed.

This is compared to a personal loan, where the required repayments cover the principal amount plus interest, and there is a fixed date for when you will have the debt paid off if you keep up with those regular repayments.

To show you what the difference in cost could be, we’ve created a hypothetical example based on average interest rates and fees from our database. In this example, you are paying off two credit cards. The first is a low-rate, non-rewards credit card with an outstanding balance of $10,000, while the second is a rewards credit card with an outstanding balance of $5,000.

If you chose to pay the minimum repayment of 2% or $20 (whichever is higher) across both cards, your repayments may look like this:

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Personal credit cards – $15,000 balance split across two cards
Low Rate Rewards
Amount owing $10,000 $5,000
Interest rate 13.79% 19.70%
Annual fee $45 $169
Minimum repayment – month 1 $202 $102
Time to repay 28 years, 2 months 43 years, 1 month
Total interest $12,332 $17,896
Total fees $1,260 $7,267
Total interest & fees $13,592 $25,163

Source: www.canstar.com.au – 25/08/2021. Average interest rates and annual fees based on products rated in the applicable profile of Canstar’s August 2021 Credit Card Star Ratings, with the Low Rate average also only based on non-rewards cards. Annual fee is assumed to be paid separately and not added to the credit card balance. Minimum repayment is assumed to be $20 or 2%, whichever is higher.

The minimum repayments on your credit cards will generally decrease over time, assuming you do not use the cards for any additional purchases.

So how much could you potentially save by consolidating your combined $15,000 credit card debt into a $15,000 unsecured personal loan? Here’s what your repayments might be if you took out the average personal loan or the average 5-Star Rated loan from Canstar’s database, repaid over three years. Bear in mind that to be eligible for these loans, you may need to have a good credit score.

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$15,000 personal loan paid off over 3 years
5-Star Rated product average Database average
Interest rate 7.05% 11.38%
Upfront fee* $60 $192
Ongoing annual fee* $5 $31
Monthly repayment $463 $494
Total interest $1,686 $2,776
Total interest & upfront fee $1,746 $2,968
Total interest & fees $1,761 $3,061

Source: www.canstar.com.au – 25/08/2021. Based on products rated in the Unsecured Personal Loan profile of the Canstar Personal Loan Star Ratings (October 2020). Average interest rate calculations use the midpoint of the rate range, where applicable. Total cost includes total interest paid plus any applicable fees, which are assumed to be paid separately and not added to the loan balance. *Average calculations for fees based on all applicable products, including those that don’t charge a fee.

In this example, your monthly repayments would be higher on the personal loan compared to the two credit cards, although your total costs would be much lower. You may be able to lower your repayments by choosing a personal loan with a longer term, but it’s important to calculate how much you would pay in interest and fees over the life of the loan and to compare this with the shorter loan term and your existing debts.

It’s important to make sure you can afford the new repayments on the debt consolidation loan. If you can, you may be able to save a significant amount in interest and fees.

You would also be able to pay off your debt over a set period of time. This is compared to credit cards where interest can accumulate over a long timeframe because providers don’t generally impose hard deadlines for repaying the full debt.

How could a debt consolidation loan affect my credit score?

A debt consolidation loan itself generally shouldn’t affect your credit score any more than any other type of personal loan. That said, when you apply for credit – including a credit card or any type of personal loan – it is noted on your credit report as a credit enquiry. If you make multiple applications in a short period of time, this could negatively impact your credit score, making it difficult for you to obtain credit in the future.

Additionally, if you don’t meet your repayments on the loan, this will generally be recorded on your credit report and may lower your credit score. In contrast, if you make your repayments on time and demonstrate a good repayment history, this would also be noted on your report and could actually improve your credit score.

Therefore, you should carefully consider your financial position before applying for this type of loan, as well as checking to ensure the loan as a whole suits your needs.

→ You can check your credit score for free

If you are finding it hard to manage your debts, you can contact a financial counsellor for help. Call the National Debt Helpline on 1800 007 007 to speak to a counsellor for free.

Cover image source: sixninepixels/Shutterstock.com

Original authors: Shay Waraker and Ellie McLachlan.


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