Should You Use a Personal Loan To Consolidate Debt?

February 2, 2021

If you have a number of repayments on the go, you may be considering debt consolidation. But, how do you know if consolidating your debts is the right option for you? In this post we’ll deep dive into the topic, covering everything from why you might want to consolidate your debts, to what you should look for in a debt consolidation option – and then how to apply.

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What does it mean to consolidate debt?

When you consolidate debt, it basically means you roll all your debts into one. So, instead of having a car loan, personal loan, store cards and credit cards that you pay off individually, you pay off all of those debts with one personal loan – and then work on paying back that loan over a period of time.

Why would you choose to consolidate?

Okay, now we’ve covered the basics of what debt consolidation is, let’s look at what it has to offer you.

  • You can take the pressure off.

If you have a number of debts you are paying off, keeping on top of all those repayment dates can get pretty stressful. You have to remember which payment needs to be paid and when making sure there is enough in your account to cover each one. If you forget to make a repayment on time – or you don’t have enough in your account – you will have to shell out in fees, which adds even more to the amount you have to pay back.

When you consolidate your debt, you only have one repayment to keep on top of. While you will still need to make sure you make this repayment on time – while ensuring you have enough in your account to cover it – it can take the pressure off knowing there is just one repayment to deal with and not multiple.

  • You can streamline your finances.

When you have a number of different types of debt, it can be difficult to keep track of not just their payment dates, but all the other need-to-know that goes along with repaying debt. This could include ongoing fees and interest costs, as well as where you stand with each debt. By consolidating those debts, you streamline your finances, making everything easier to manage.

  • You can spread the cost.

When it comes to paying off debt, you have fixed repayments you have to make – with car loans and personal loans – and debts you need to make at least the minimum repayment on, like credit cards. By choosing to consolidate those debts, you can spread the cost to create a more manageable repayment schedule.

For example, you could reduce the amount you pay each month on your car loan repayments by spreading the loan over a longer period. With your credit card repayments, you could make sure you pay more than the minimum while avoiding getting hit with the high-interest costs that come with carrying a balance.

  • You can save on interest.

Consolidating debt can allow you to save on interest. While spreading your debt over a longer period will typically mean you pay more in interest overall – while benefitting from a more manageable repayment schedule – you may be able to reduce your interest costs, depending on the type of debts you want to consolidate, and the type of consolidation option you choose.

As an example, if you have a number of credit cards to pay off, each with a balance attracting a high rate of interest, you could save on interest by rolling those balances into a lower interest loan. How much you save will depend on the loan’s rate and the length of the loan. Using a personal loan calculator should help you to see how much you’d save.

  • You can put an end date on your debt.

When you have a number of debts on the go, it can feel like you’ll never pay them off. Paying off credit cards, especially, can feel like this, as they are designed to offer a revolving form of debt. So, if you don’t clear your balance each month, you carry that balance over and keep paying interest on it until it’s paid off.

With a credit card, you only have to make a minimum repayment each month. But, doing this could mean you stay in debt for years – paying through the nose in interest as you go. With a debt consolidation loan on the other hand, you have a fixed loan term and a specified repayment to make each month. This puts an end date on your debt, giving you something to strive for.


Dayna has a debt of $10,000 on her credit cards, each with a rate of 18% p.a. She wants to consolidate her cards so she can pay down her debt faster while paying less in interest. She chooses a personal loan with a rate of 8% p.a., paid off over a period of three years. Paying off her personal loan, she pays $313 per month. Over a period of three years, she pays back a total of $1,281 in interest.

If she had stuck with her credit cards, she would have cleared her debt in three years and seven months while paying off $313 per month. Over that period, she would have paid $3,432 in interest.

Not only would Dayna be in debt seven months longer choosing not to consolidate her debt, she would also pay $2,151 more in interest.

When might you choose not to consolidate?

It goes without saying that debt consolidation is not for everyone. Depending on your situation, it might make sense to look for other options and take another route. Here are some examples of when a debt consolidation loan may not be the best choice.

  • When it would cost more.

Debt consolidation isn’t always the cheapest option. If consolidating your debts means you pay more in interest and fees, it could be a better idea to look at other options. As we mentioned previously, stretching out your debt to pay it off over a longer period could result in higher interest costs – but you would have to weigh that against the benefits of having a lower repayment each month.

  • When you’d end up worse off.

You need to put in the effort if you want to make debt consolidation work for you. That means always making your new repayment on time to avoid fees. It also means avoiding racking up more debt on your cleared credit cards. If you think you would end up in a worse financial situation by consolidating your debts, you may be better off getting financial counselling first.

  • When you know you won’t get approved.

When you apply for a debt consolidation loan, you have to prove to the lender that you are able to repay the loan. During the application process, the lender assesses your financial situation, looking at your assets and debts, your income and outgoings, and your employment and credit history.

If you know you won’t get approved for a new loan, it would be best to avoid applying until you have improved your financial situation and rebuilt your credit.

Which debts can you consolidate?

Want to know which debts you can roll into your debt consolidation loan? That will really depend on the loan and the lender. You should be able to consolidate most well-known debts such as personal loans, car loans, credit cards and store cards. You may also be able to consolidate lines of credit and hire purchase.

When you are choosing which debts to consolidate, you may want to check with the lender to see if there are any stipulations regarding what you can and can’t use the loan for. You’ll also need to consider the overall amount you’ll need to borrow to pay off each debt. You may only be approved to borrow up to a certain amount, which could limit which debts you can roll into the loan.

Debt Consolidation Options

On this page, we are focusing on using a personal loan – or debt consolidation loan – to consolidate debt. But, there are other debt consolidation options you may be considering. Here’s a quick rundown of what they are and how they work.

Personal Loan

  • With a personal loan, you borrow a certain amount, and then use the funds from the loan to pay off your other debts.
  • You have a fixed loan term and a set repayment schedule – with repayment amounts that may vary over time depending on whether you opt for a fixed or variable rate.
  • You can choose to pay off the loan over a period of one to seven years, depending on the lender.
  • You will pay fees and interest on the loan. Opting for a secured loan could lower your interest costs.
  • Applying for a personal loan is a simple process. Your main consideration will involve choosing a loan term and repayment schedule that works for you – and making sure you will be approved.

Home Loan Refinance

  • If you have sufficient equity in your home, you may choose to refinance your home loan to release some of that equity and use the funds to clear your debts.
  • By increasing your home loan, you may also increase your repayments.
  • You are effectively adding your other debts to your home loan. While your home loan may have a lower rate than a personal loan, you may end up paying more in interest overall, as you are spreading the debt over a much longer period.
  • Depending on the market, refinancing your home loan could allow you to take advantage of a better deal on a lower rate. This could lower your repayments and interest costs overall.
  • Refinancing can be an involved process. If you are changing lenders, you not only have to compare all the options, you have to go through the complex process of applying. This can involve additional fees and lots of paperwork.
  • You will also need to make sure you will be approved.

Balance Transfer Credit Card

  • If you have a number of credit cards on the go, you could apply for a balance transfer card, to then transfer each existing balance onto the new card.
  • With the right balance transfer offer, you could enjoy a long introductory period with no interest. This could allow you to pay down your balance faster while saving big on interest.
  • Depending on the card provider, you may be able to transfer balances from credit cards, store cards, personal loans and hire purchase.
  • Introductory periods are limited to around 24-26 months, at most. If you have a large balance to pay down, you will need to work hard to pay it off within that period.
  • With no set repayments, you need to be disciplined in order to pay off your balance. You will also need to avoid spending on your old cards and racking up more debt.
  • While the application process is straightforward, you will need to be meet the card’s eligibility criteria to be approved.
  • Some cardholders get stuck in a cycle of debt, using balance transfers to move their debt around, without ever paying it off.

How To Compare Debt Consolidation Loans

Decided on a personal loan to consolidate your debt? Okay, what should you look for as you compare the options?


One of the first things to consider on a debt consolidation loan is interest. The rate applied to your loan will affect not only the overall cost of the loan but the amount you pay in repayments each month. The interest you pay on the loan will depend on a number of factors, including how much you borrow, the loan term you choose, and your credit score.

Whether you opt for a fixed rate or variable rate loan will also influence your interest costs.

  • With a fixed-rate loan, the rate on the loan stays the same throughout the loan term. This can help you manage your budget more efficiently, as you always know how much your repayment will be. You may find fixed-rate loans provide a lower rate than variable-rate loans, and it can offer peace of mind to lock in that rate. However, if rates rise elsewhere during your loan term, you won’t benefit.
  • With a variable rate loan, the rate applied to your loan may vary. Your rate may go up or down to follow the official cash rate, but your rate will be ultimately determined by your lender. Variable-rate loans tend to offer more flexibility, typically allowing for extra repayments and early payout, without the penalties often associated with fixed-rate loans.

Personal Loan Fees

Another cost you will have to factor in is fees. Most personal loans charge a one-off establishment fee, ongoing fees, or both. It’s worth adding up all the fees you will pay before you apply, as this should help you compare the true cost of each loan more accurately.

  • Upfront Fee: This is sometimes called an application fee or establishment fee. It is a one-off fee charged by the lender to establish the loan. It may be added to the loan amount and repaid over the loan term within the repayments.
  • Ongoing Fees: These are sometimes called service fees or monthly fees. They are ongoing fees charged on a regular basis for administering the loan.

Niall is comparing personal loans.

  • Loan A comes with an establishment fee of $450 and no ongoing fees.
  • Loan B comes with a monthly fee of $10 and no establishment fee.
  • Loan C comes with an establishment fee of $150 and a $5 monthly fee.

Within a three year loan, Loan A charges $450 overall in fees, Loan B charges $360 overall in fees, and Loan C charges $330 overall in fees.

Within a five year loan, however, things look slightly different. Loan A still charges $450 overall in fees, Loan B charges $600 overall in fees, and Loan C charges $450 overall in fees.

Obviously though, while those fee costs are important to calculate and consider, Niall will need to also factor in the interest cost on each loan to work out the affordability of each option.

TIP: Using the comparison rate can help you compare loans initially. This rate factors in known fees – such as establishment fees and ongoing fees – as well as the loan’s advertised rate. However, it’s worth bearing in mind that the comparison rate is based on a specific set of circumstances, for example, a $10,000 loan borrowed over three years. That means the comparison rate you see on paper may not be the rate you get.

Any other fees? Yep, you may be expected to pay certain other fees on your personal loan, depending on the type of loan you choose – and how you manage it.

  • Breakcost Fee: This fee may be charged on fixed-rate loans if you repay the loan early. The fee will typically be determined by how much the lender stands to lose by ending the loan early, taking into account the loan’s rate and the amount of time before the original term is due to end. If you think it’s likely you will repay the loan early, look for a loan that allows for this, with no breakcost fee.
  • Late Payment Fee: This fee is charged by the lender when you fail to make a repayment by the due date. You can avoid paying this fee by setting up a direct debit or automatic payment.

Personal Loan Features

Moving away from cost comparison, it’s time to assess the features on offer.

  • Secured vs. Unsecured: With a secured loan, you use an asset to secure the loan. This lowers the risk for the lender, which can result in a lower rate and easier approval for you. With an unsecured loan, there is no collateral needed. This can make it more appealing to borrowers who don’t have an asset worthy of using as collateral, or those who don’t want to risk losing their asset if they fail to repay their loan.
  • Extra Repayments: Loans that offer extra repayments without penalty can work out cheaper in the long run, as they allow you to pay down your loan faster while paying less in interest. With this feature, you may be able to make one-off payments when it suits you, or payer a higher repayment amount each month.
  • Redraw: Using a redraw facility, you can redraw extra repayments paid into the loan, as and when you need. This gives you a bit more freedom to pay in more when you can, knowing you have the option to withdraw it should you need it later down the line.
  • Repayment Flexibility: Lots of loans now allow you to choose when you want to make repayments. With this flexibility, you could opt to pay your repayments weekly, fortnightly or monthly, as you align your repayments to fit your budget.



With each of the above features comes a certain amount of flexibility. This can be great to have should you need it. But it’s worth bearing in mind that choosing a loan with more features and flexibility can come at a higher cost. So, if you don’t think you’ll need those extras, opting for a more basic, lower-cost loan could be a better option for you.

How do you apply?

When it comes time to apply, it can help to know what’s expected of you. Each lender will have its own application process – and application criteria – so are sure to check the small print before you apply. In general, however, this is what you could expect when you apply directly from the lender.

Compare Your Options

Compare all the options and choose the loan that meets your needs. Decide how much you need to borrow to pay off your other debts, and consider how much you think you will be approved for. Use a personal loan calculator to compare loan terms, then choose the term that offers an affordable repayment schedule over the shortest period of time.

Check Your Credit

You can apply for a copy of your credit report from the three main credit reporting agencies in Australia, or go with a third party provider. Check your report for errors – and apply to have them corrected. If your credit isn’t great, you may be better off working on paying down your debt and improving your credit before you apply.

Boost Your Financial Situation

The lender will look at your financial situation to determine how much of a risk you are. If you have a crazy amount of debt, no savings, and unsteady employment, you may find it hard to get approved. While the aim of debt consolidation is obviously to pay down debt, you will still need to prove you are not a liability – and that you will be able to repay your loan as per your contract.

Check The Eligibility Criteria

Each lender will have different lending criteria – but that criteria may look something like this.

  • You must be aged 18 or over.
  • You must be an Australian citizen or permanent resident (some lenders offer loans to New Zealand citizens and those who hold certain visas).
  • You must live in Australia.
  • You must be employed or receive regular income.
  • You must meet the stated income requirements.
  • You must have good credit.
  • You must not be going through the process of bankruptcy.

It’s worth pointing out that using a broker such as Credit World can vastly reduce the amount of effort required to apply for a personal loan. Why you go through a broker, they do the comparison for you, providing you with options you will be eligible for, to then deal with the intricacies of the application. To find out more, just give Credit World a shout.

Q. Can you apply for a debt consolidation loan with bad credit?

A. That depends. You may be able to get approved by a lender that specialises in bad credit loans. These tend to come at a higher cost. But, you can use the loan to improve your credit by always making your repayments on time. Another option may be to use a guarantor on your loan. This person basically guarantees the loan, committing to repay it if you don’t.

Disclaimer: The information contained within this post is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.


Tip:You’ve been approved! Congratulations. Now it’s time to make that loan work for you. Here are some important points to keep in mind as you repay your loan.

  • Always make your repayments on time- Not only will this help you avoid late payment fees, it should also help you build your credit over time.
  • Make extra repayments when you can- If your loan allows for extra repayments, try to put in extra when you can. This should help lower your interest costs, to potentially pay off your loan sooner.
  • Close your old accounts- If you paid off credit cards and lines of credit with your loan, avoid racking up more debt on them by closing the accounts. Try to avoid taking on more debt until your loan is paid off.

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