What should I consider when looking at debt consolidation?

Table of Contents

• What Is Debt Consolidation and How Does It Work?
• Pros and Cons of Debt Consolidation You Need to Know
  • When Consolidation Makes Financial Sense
  • When You Should Pause Before Proceeding
• How to Consolidate High Debt: A Step-by-Step Process
  • Step 1: List Every Debt and Its True Cost
  • Step 2: Choose the Right Consolidation Method
  • Step 3: Compare Lenders Using the Comparison Rate
  • Step 4: Apply and Close the Old Accounts
• Types of Debt Consolidation: Personal Loans, Balance Transfers and Mortgage Refinancing
• How to Improve Your Credit Score for Debt Consolidation
• Hidden Fees, Gotchas and the Psychological Impact of High Debt
• Free Financial Counselling Australia: Where to Get Help
• Conclusion: Finding the Best Way to Consolidate High Debt

Last Updated: August 9, 2026

What Is Debt Consolidation and How Does It Work?

Debt consolidation involves combining some or all existing debts into a new loan or credit arrangement. This may result in fewer repayments to manage, but the costs, interest rates, fees, loan term and risks of the new arrangement need to be considered.

A new credit product may be used to repay nominated existing debts, after which the new credit arrangement is repaid according to its applicable terms and conditions.

Debt consolidation does not eliminate the amount owed. Depending on the interest rate, fees, repayment term and type of credit used, consolidation may reduce or increase the overall cost of repaying the debt. Extending short-term debt over a longer loan term may result in more interest being paid over time.

Pros and Cons of Debt Consolidation You Need to Know

Potential advantages:

• Lower overall interest rate compared to credit cards and store cards
• Single monthly repayment instead of multiple payments
• A fixed-rate arrangement may provide more predictable repayments during the fixed-rate period
• A fixed-term loan may provide a stated repayment term

Potential disadvantages:

• Extending your loan term can increase total interest paid, even at a lower rate
• Secured loans put your property at risk if you default
• Establishment and ongoing fees can erode savings
• Without changing spending habits, you risk accumulating new debt on cleared credit cards
• Your credit score may be affected short-term by a new application

Factors to Consider When Reviewing Debt Consolidation

When considering debt consolidation, relevant factors may include the interest rates and fees on existing debts, the proposed interest rate and fees, the new repayment amount, the proposed loan term, whether security is required and the total estimated cost over the life of the new arrangement.

A lower advertised interest rate does not necessarily mean the new arrangement will cost less overall. Extending the repayment period or adding establishment, discharge or other fees may increase the total amount paid.

When You Should Pause Before Proceeding

Consumers may also wish to consider what will happen to existing credit facilities after consolidation. Repaying a credit-card balance does not necessarily close the account or reduce its credit limit. Continuing to use existing facilities after taking out a consolidation loan may increase total debt.

Before closing, reducing or changing an existing credit facility, consumers should consider their circumstances and the terms of the relevant arrangement.

How to Consolidate High Debt: A Step-by-Step Process

Approach consolidation methodically rather than rushing to the first lender who approves you.

Step 1: List Every Debt and Its True Cost

Write down every debt: credit cards, personal loans, store cards, buy-now-pay-later balances, and other outstanding amounts. For each, record the current balance, interest rate, minimum monthly repayment, and any exit fees. Recording these details allows the costs and repayment arrangements of existing debts to be compared with an illustrative consolidation scenario. Interest rates should not be considered in isolation from fees, repayment terms and other applicable costs.

Step 2: Choose the Right Consolidation Method

Understand Common Debt-Consolidation Approaches. https://financecorp.com.au/debt-consolidation-perth/

Common debt-consolidation approaches may include a personal loan, a credit-card balance transfer or, for some homeowners, refinancing involving home-loan debt. The availability and suitability of any credit arrangement depends on the consumer’s circumstances, lender requirements and applicable credit assessment.

Personal loans may be secured or unsecured and can have different interest rates, fees, repayment terms and conditions. A secured loan involves an asset being used as security, while an unsecured loan does not involve that form of security.

A credit-card balance transfer moves eligible credit-card debt to another credit card, usually at a promotional or lower rate for a limited period. Fees, minimum repayments, transfer limits and the interest rate applying after the promotional period should also be considered.

Where unsecured debt is consolidated through home-loan refinancing, the debt may become secured against the property and may be repaid over a longer period. A lower interest rate does not necessarily result in a lower total borrowing cost, particularly where the repayment period is significantly extended.

Step 3: Compare Rates, Fees, Terms and Other Costs

The advertised interest rate is only one part of the cost of a credit product. For relevant fixed-term consumer credit, a comparison rate can assist with comparing interest and most fees and charges for the example amount and term on which the comparison rate is calculated.

A comparison rate does not include every possible cost and is only accurate for the example amount and term used to calculate it. Other matters, including loan features, repayment arrangements, conditional charges and the proposed loan term, may also affect the overall cost.

Where an advertisement for applicable fixed-term consumer credit includes an annual percentage rate, the National Credit Code contains requirements relating to the display of a comparison rate and accompanying information.

Step 4: Understand What Happens to Existing Debts

If a consolidation application is approved and proceeds, the nominated existing debts may be paid out using the new credit arrangement. Consumers should confirm which accounts have been repaid and whether existing credit facilities remain open.

Repaying an outstanding balance does not necessarily close a credit facility. Any decision to close, retain or change an existing facility should take into account the consumer’s circumstances and the terms of the relevant arrangement.

Types of Debt Consolidation: Personal Loans, Balance Transfers and Mortgage Refinancing

Personal loans may be available with different loan amounts, terms, fixed or variable interest rates, fees and eligibility requirements. Actual terms depend on the credit provider and the consumer’s circumstances.

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Balance-transfer credit cards may offer a promotional interest rate for a limited period. The promotional period, transfer limits, applicable fees, minimum repayments and the rate applying after the promotional period vary between products.

Home-loan refinancing may allow eligible homeowners to consolidate other debts into lending secured by their property. This can involve different interest rates and repayment terms, but may also result in formerly unsecured debt being secured against the home. Extending the repayment period can increase the total amount of interest paid even where the interest rate is lower.

How to Improve Your Credit Score for Debt Consolidation

A consumer’s credit report or credit score may be one of a number of factors considered by a lender when assessing a credit application or determining available terms. Lenders may also consider matters such as income, expenses, existing liabilities, repayment history and their own lending criteria. Consumers may wish to check their credit report before applying for new credit.

The Australian Retail Credit Association’s guide to credit reporting in Australia explains how comprehensive credit reporting works.

Here are the most effective steps to improve your credit score before applying:

1. Get your credit report. You have a right to obtain a free copy of your consumer credit report from a credit reporting body once every three months. Current information about Australian credit reporting bodies is available through Moneysmart and the Office of the Australian Information Commissioner.
2. Make every existing repayment on time. Set up direct debits to ensure you never miss a due date.
3. Reduce your credit card balances. High credit utilisation signals financial stress to lenders.
4. Avoid multiple credit applications. Each application creates a credit enquiry. Multiple enquiries in a short period can lower your score.
5. Close unused credit accounts. Existing credit facilities and credit limits may be relevant to a lender’s credit assessment.
6. Allow time. Different categories of credit information remain on a credit report for different statutory periods. For example, defaults and credit enquiries generally remain for five years.

Hidden Fees, Gotchas and the Psychological Impact of High Debt

The hidden costs to watch for:

• Establishment fee: Charged upfront when the loan is approved, ranging from nominal amounts to several hundred dollars.
• Monthly service fee: An ongoing fee that adds to the true cost of the loan.
• Early repayment adjustment: Some fixed-rate loans charge a fee if you pay out the loan before the end of the term.
• Balance transfer fee: On credit card balance transfers, typically charged as a percentage of the amount transferred.
• Break costs on mortgage refinancing: Exiting a fixed-rate home loan early can trigger significant break costs.

Debt consolidation versus a debt agreement or bankruptcy:

A formal debt agreement under Part IX of the Bankruptcy Act 1966 is a legally binding insolvency arrangement and is different from a debt-consolidation loan. Debt agreements can have significant consequences for a person’s credit history and are recorded on the National Personal Insolvency Index for periods determined by the Bankruptcy Act and applicable rules. For a completed debt agreement, AFSA states that the information generally remains on the NPII for five years from the date the agreement was made or until the obligations are completed, whichever is later. Different periods may apply where an agreement is terminated, declared void, withdrawn or rejected.

Bankruptcy and other formal insolvency options have separate legal and financial consequences. Consumers considering a formal insolvency option should obtain information from AFSA and consider free financial counselling and independent legal advice before making a decision.

Debt consolidation is different because it involves obtaining or restructuring credit rather than entering a formal personal insolvency arrangement. Whether new credit is available or appropriate will depend on the consumer’s circumstances and applicable credit assessment.

Managing multiple debts and repayment dates may be difficult for some consumers. Consolidation may reduce the number of separate repayments being managed, but it does not reduce the amount owed simply by combining debts, and the financial costs and risks of the new arrangement still need to be considered.

Free Financial Counselling Australia: Where to Get Help

Free financial counselling services are available in Australia for people experiencing debt or financial difficulty.

The National Debt Helpline (ndh.org.au) offers free, confidential financial counselling by phone and online chat. Counsellors are qualified professionals who can help you understand your options, negotiate with creditors, and create a repayment plan. They do not sell financial products. Phone support is available from 9:30 am to 4:30 pm weekdays, with chat available until 8:00 pm.

Way Forward (wayforward.org.au) is a not-for-profit organisation that creates free debt management plans for Australians experiencing long-term financial hardship. If you have regular income but struggle to manage multiple creditors, Way Forward can negotiate affordable arrangements on your behalf.

Consumers experiencing financial difficulty may wish to speak with a free financial counsellor before applying for additional credit. A financial counsellor can discuss available options, including hardship arrangements and debt-management approaches.

Considering Debt Consolidation

Debt consolidation may involve different costs, risks and repayment arrangements depending on the type of credit used, the debts being consolidated and the proposed repayment term. A lower interest rate does not necessarily mean that the overall cost will be lower.

FinanceCorp provides credit assistance under Australian Credit Licence 395037. FinanceCorp brokers gather information about a consumer’s requirements, objectives and financial situation before explaining and comparing available options from the FinanceCorp lender panel. FinanceCorp does not compare every lender or credit product in the market.

Where debt consolidation involves a new credit application or refinancing, any recommendation or application remains subject to applicable enquiries, verification, preliminary assessment, broker accreditation, lender criteria and approval.

Consumers experiencing financial difficulty or who are unable to meet existing repayment obligations may also wish to contact the National Debt Helpline or another free financial counselling service before applying for additional credit.

This article was written using GrandRanker