Four debts do not become cheaper just because you put them in one place.
That is the first thing to understand about a consolidation loan.
A consolidation loan is a new loan used to pay off several existing debts. Instead of owing money to multiple lenders with different interest rates, repayment amounts and due dates, you replace those debts with one loan and one regular repayment.
It can make debt considerably easier to manage. If the new interest rate is lower than what you are currently paying, it can also reduce what the debt costs you. But consolidation does not make debt disappear. You still owe the money. You have simply changed how it is structured.
How does a consolidation loan work?
Say you currently have:
- A credit card balance
- A personal loan
- A store finance balance
- A buy now pay later balance
Each debt may have its own repayment date, interest rate and fees.
With a consolidation loan, you borrow enough to clear the debts you want to consolidate. Those balances are paid off and you are left with the new consolidation loan.
Instead of four balances, you now have one.
Instead of keeping track of several payment dates, you have one regular repayment.
And instead of paying several different interest rates, the consolidated balance sits under one rate.
That is essentially all debt consolidation is. The important part is whether the new loan puts you in a better position than the debts it replaced.
Is a consolidation loan just a personal loan?
Usually, yes.
“Debt consolidation loan” describes what the loan is being used for, rather than an entirely separate type of borrowing.
A personal loan might be used to buy a car, renovate a home, pay for travel or cover a large expense. When that personal loan is specifically used to pay off other debts, it becomes a consolidation loan. Depending on the lender and your circumstances, the new loan may be secured or unsecured.
An unsecured consolidation loan does not have a particular asset pledged as security. A secured loan uses an acceptable asset as security and can sometimes attract a lower interest rate because the lender is taking less risk.
The trade-off is that the secured asset can be at risk if you fail to meet the repayments.
What actually happens to your existing debts?
This is where people sometimes misunderstand consolidation.
The new loan pays out the balances being consolidated. Those debts do not sit alongside the new loan.
For example, imagine you owe:
- $6,000 on a credit card
- $4,000 on a personal loan
- $3,000 on store finance
You have $13,000 of debt in total.
If you take out a $13,000 consolidation loan and use it to clear all three balances, you still owe $13,000 before interest and fees are taken into account.
The difference is that the $13,000 now sits in one place.
That may sound like a small change, but it can make a substantial difference if you were previously paying high interest rates or struggling to keep track of multiple repayment dates.
Does debt consolidation reduce what you owe?
Not automatically.
A consolidation loan is not debt forgiveness. Your balances are being transferred into a new loan, not wiped.
The potential saving normally comes from the interest rate and repayment structure.
If you move high-interest debts onto a lower-rate loan and keep the repayment term sensible, you may pay considerably less interest before becoming debt-free.
If the new rate is not much lower, or you stretch the debt over a much longer period, the result can be very different.
You can end up with a smaller weekly repayment but a larger total cost.
That is why comparing repayments alone is a mistake.
Lower repayments do not always mean a cheaper loan
Imagine your current debts are costing you $700 a month.
After consolidating, your new repayment drops to $450.
That looks like a $250 monthly saving.
But why did the repayment fall?
If most of the difference came from a lower interest rate, the consolidation could genuinely be saving you money.
If the difference came from stretching the debt over another three years, you may simply be paying a smaller amount for much longer.
Both options can have a purpose. If your immediate problem is that the existing repayments no longer fit comfortably within your budget, lowering the regular repayment may be useful.
But it is not the same thing as lowering the total cost.
Before consolidating, compare:
- The balances you currently owe
- The interest rates on those debts
- How long they have left to run
- The total remaining cost
- The rate on the consolidation loan
- The new loan term
- Establishment and broker fees
- The total amount repayable on the new loan
What debts can go into a consolidation loan?
Consolidation is generally used for consumer debts such as credit cards, personal loans, store finance, hire purchase, overdrafts and buy now pay later balances.
An existing vehicle loan can sometimes be included as well, depending on the lender and whether consolidating it makes financial sense.
You do not necessarily need to consolidate every debt you have.
For example, rolling a very low-interest debt into a new loan at a higher rate would make little sense simply for the convenience of having one repayment.
The point is not to put absolutely everything into one loan. It is to improve the way your debt is structured.
What happens to your credit cards after consolidation?
Paying off the balance and closing the account are two different things.
If your consolidation loan clears a $7,000 credit card, that card may now have $7,000 of available credit again unless the account is closed or the limit is reduced.
This is where consolidation can go badly wrong.
You clear the credit card.
The balance returns to zero.
You start using it again.
Six months later you have a consolidation loan and another credit card balance.
You have not consolidated the debt. You have added to it.
If credit cards or revolving credit helped create the problem in the first place, consider whether keeping those facilities open actually makes sense once they have been cleared.
The goal should be to make the existing debt easier and cheaper to repay, not create space for another round of borrowing.
Consolidation loan vs refinancing: what is the difference?
The two ideas are closely related, but they are not quite the same thing.
Refinancing usually means replacing one existing loan with a new loan. You might refinance a personal loan because another lender is offering you a better rate.
Debt consolidation normally means replacing several debts with one new loan.
If you replace one $15,000 personal loan with another $15,000 personal loan, you are refinancing.
If you combine a $7,000 credit card, $5,000 personal loan and $3,000 store balance into one $15,000 loan, you are consolidating.
In both cases, you are replacing existing borrowing with new borrowing. The difference is how many debts are being replaced and what you are trying to achieve.
Is a consolidation loan the same as a balance transfer?
No.
A credit card balance transfer moves debt from one credit card to another credit card, often with a low or 0% promotional interest rate for a set period.
A consolidation loan moves the selected debts into a personal loan with a fixed repayment schedule and an agreed end date.
That fixed end date is one of the main differences.
Credit cards are revolving credit. Pay the balance down and you can generally borrow against the available limit again.
A personal loan works differently. You make scheduled repayments until the balance reaches zero.
For someone trying to get completely out of debt rather than continually recycle it, that structure can be useful.
Does a consolidation loan always have a lower interest rate?
No.
Getting a lower rate is one of the main reasons people consolidate, but it is not guaranteed.
The rate you are offered will depend on your circumstances and the lender assessing the application.
This is also why comparing consolidation loans using advertised “from” rates is not particularly useful.
The number that matters is the actual rate available to you and what the loan will cost after fees.
Factors can include your:
- Credit profile
- Income
- Existing financial commitments
- Loan amount
- Loan term
- Repayment history
- Choice of secured or unsecured borrowing
Is debt consolidation the same as getting out of debt?
No.
It can give you a clearer route there.
One of the useful things about a consolidation loan is that it turns several balances into a single repayment with a fixed schedule.
You can see exactly what you owe.
You know what is coming out of your account.
And you have an end date.
But the loan itself does not fix overspending, an unaffordable budget or continually relying on credit to cover everyday costs.
If the behaviour that created the original balances continues after consolidation, the debt problem can return.
Think of consolidation as restructuring the debt you already have. What happens after that matters just as much.
What does a consolidation loan look like through Lending Room?
Lending Room is a registered finance broker rather than a direct lender.
When you apply for debt consolidation through us, we assess your circumstances and match your application across multiple vetted lenders rather than giving you one lender’s standard option.
Our initial assessment uses a soft credit check, which does not affect your credit score.
Debt consolidation loans available through our panel range from $3,000 to $250,000 over terms from 6 to 84 months. Secured rates currently start from 8.99% p.a. (AIR) and unsecured rates from 10.99% p.a., with the rate available to you depending on your individual profile and lender criteria.
If you want to see what your existing debts could look like combined into one loan, get in touch with the Lending Room team or read more about our debt consolidation loans.
This article is for general information only and does not constitute financial advice. Lending Room is a registered financial services provider (FSP486566). We are a broker and do not lend directly. Rates from 8.99% to 29.95% p.a. (AIR). Establishment fees up to $450 and broker fees up to $1,500 may apply. Your rate and approval are subject to lender credit criteria.