Debt consolidation: is it right for you?

Debt consolidation can help some Australians simplify repayments and reduce interest, but it isn’t right for everyone. Whether it works depends on your income stability, total debt, spending habits, and ability to avoid taking on new credit. In many cases, budgeting and creditor negotiation may be a safer alternative.

Ever feel like every debt repayment you make disappears into the black hole of interest charges? You might have asked yourself what debt consolidation is, and wondered if it could be your saving grace.

To put things into perspective, research from Finder shows that the average Australian carries significant non‑mortgage debt. When you add up personal loans, money owed to family and friends, credit card debt, payday loans and buy now, pay later (BNPL) debts, it totals more than $25,000 per person. It’s easy to see why repayments can start to feel overwhelming.

Together, we’ll break down how debt consolidation works, weigh up the pros and cons, and share two real MyBudget client experiences to help you decide whether debt consolidation is the right option for you. Let’s find out.

Debt consolidation is the process of combining multiple debts into one single loan, usually with a lower interest rate and just one monthly repayment.

People often use a debt consolidation loan to:

• Consolidate credit card debt
• Combine personal loans, store cards, BNPL accounts and car loans
• Reduce high interest charges
• Simplify debt repayments and cash flow.

Instead of juggling multiple creditors, interest rates, and payment dates, you manage one loan, one repayment schedule, and one lender.

Debt consolidation works by replacing multiple debts with a new loan that pays them off in full.

Here’s how the process typically works in Australia:

1. You apply for a debt consolidation loan through a bank or lender
2. The lender assesses your credit report, income, expenses, and financial position
3. If approved, the loan funds are used to pay off existing debts such as credit cards or personal loans
4. You make one regular repayment based on the new loan term, interest rate, and fees.

Debt consolidation can be secured (using collateral such as your home) or unsecured (no asset required). Secured loans often have lower interest rates but carry higher risk.

Types of debt consolidation loans

Debt consolidation loans generally fall into two categories: secured and unsecured. The main difference comes down to risk and interest rates.

Secured debt consolidation loans

These loans are backed by an asset, usually your home. Because the lender has collateral, interest rates are often lower, but missed repayments put that asset at risk.

Unsecured debt consolidation loans

These loans don’t require collateral, but typically come with higher interest rates to offset the lender’s risk.

Choosing between the two depends on your financial position, risk tolerance, and ability to meet repayments consistently.

Debt consolidation can be a good idea if it lowers your interest rate, improves cash flow, and helps you stick to a clear repayment plan.

It may suit you if:

• You’re paying high interest on credit card debt
• Your repayments feel unmanageable or disorganised
• You have stable income and predictable expenses
• You can avoid using credit again after consolidation.

However, debt consolidation is not automatically debt relief. If spending habits don’t change, or if the loan term is extended too far, you may pay even more interest over time. This is especially true if you’re only making minimum credit card repayments, which can significantly increase the true cost of credit card interest over the life of the debt.

If you’re feeling overwhelmed by juggling multiple repayments, debt consolidation can offer some genuine advantages, especially when it’s paired with a clear budget and realistic repayment plan.

• Lower interest rates compared to most credit cards
• One monthly repayment instead of multiple payments
• Improved cash flow and budgeting clarity
• Potential credit score improvement with consistent on-time payments
• A clearer path to becoming debt-free.

When paired with strong budget management, consolidation can provide structure and momentum.

Before consolidating debt, it’s worth pausing to look at the other side of the equation. While debt consolidation can feel like a relief at first, it can come with trade-offs that may create longer-term financial pressure if you’re not careful.

Before consolidating debt, it’s important to consider the risks:

• Longer loan terms can increase total interest costs
• Fees and charges such as establishment and closing costs
• Secured loans put assets at risk if repayments are missed
• Temporary credit score impacts from new loan applications
• Ongoing debt if spending habits don’t change.

This is why consolidation should never happen without reviewing your full budget and repayment capacity first.

If you’re weighing up your options, our guide on debt consolidation vs personal budgeting breaks down the key differences to help you decide which approach may suit your situation best.

Debt consolidation can temporarily lower your credit score at first, but it may improve your credit score over time if repayments are made consistently and no new debt is added.

Short-term impacts may include:

• A hard credit inquiry during the application process
• A new account reducing your average credit age

Long-term benefits may include:

• Improved payment history
• Lower credit utilisation
• Fewer missed repayments.

You should consider consolidating your debt only if it reduces interest, fits within your budget, and supports long-term financial stability. For some people, a consolidation loan is part of how to get out of debt, but for others, budgeting, debt management or creditor negotiation may be a more sustainable solution.

Ask yourself:

• Can I comfortably meet the new repayment schedule?
• Does this loan reduce my overall interest costs?
• Have I addressed the habits that contributed to the debt?
• Would budgeting or creditor negotiation work better instead?

If you are not sure, consolidation may not be the best first step. Mapping out your income, expenses and repayments can help clarify your options. Our Personal Budget Template can give you a clearer picture of what you can realistically afford before committing to a consolidation loan.

If you need a little extra help, our guide on how to set up a budget walks you through the basics of building a realistic budget that supports your debt repayments.

Debt consolidation isn’t the only way to get help with debt. Alternatives include:

• Budget planning to prioritise repayments
• Negotiating with creditors to reduce interest or fees
• Debt management plans with structured, negotiated repayments
• Financial coaching and budgeting help so you can regain control and pay down debt without new loans.

These options are all areas where MyBudget can help with Australian debt relief through budgeting, debt management and structured repayment support.

If you’re feeling unsure about the best next step, you can enquire online or call one of our expert Money Coaches today on 1300 300 922 to talk through your situation and explore the right option for you.

Example 1: When debt consolidation works

Callum and Sally came to MyBudget juggling 17 separate debts, including credit cards, personal loans and family loans, alongside their home loan. Their total monthly debt repayments had climbed to $5,841, leaving little breathing room in their budget.

By consolidating their debts into a single loan through MyBudget Loans, their monthly repayments dropped to $4,099, saving them $1,741 each month. This gave them the structure and cash flow they needed to clear family debts and plan home renovations, while staying on track with one manageable repayment.

Try our Debt consolidation calculator

Example 2: When debt consolidation isn’t the right solution

MyBudget client Jerry believed a debt consolidation loan was his only option after falling behind on bills and relying heavily on his overdraft. The rising cost of living was taking a toll, and his finances felt completely out of control.

Instead of taking on another loan, MyBudget helped Jerry build a realistic budget and negotiated directly with his creditors. Within a year, he had saved $5,000 and started paying down his overdraft, without adding new debt. For Jerry, structured budgeting and creditor support proved to be the safer, more sustainable path forward.

Debt consolidation can help some Australians regain control of their finances, but it isn’t a one-size-fits-all solution.

The best outcome comes from:

• Understanding how consolidation works
• Reviewing interest rates, fees, and loan terms carefully
• Aligning repayments with a realistic budget
• Choosing long-term structure over short-term relief.

Sometimes, the smartest move isn’t another loan. It’s a clear plan to manage your money with confidence.

Still not sure if debt consolidation is right for you? Whether you’re weighing up your options or need help with an alternative approach, our expert Money Coaches can help you find the best way to get out of debt and still reach your financial goals.

Enquire online or call 1300 300 922 today to get personalised support.