When consolidating debt saves money, and when it doesn't

Rolling several debts into one loan is one of the most common things people ask us about. It can make a real difference. It can also quietly cost more than leaving things as they are.

What consolidation actually does

You take out one new loan, use it to pay off the others, and make one repayment from then on. The new loan might be a personal loan, a top-up of your home loan, or a refinance against property you own.

What changes is the rate, the fees and the term. Whether you come out ahead depends on all three, not just the monthly figure.

The monthly repayment can mislead

A lower repayment feels like a saving, but it's often partly the result of spreading the debt over more years. Credit card or personal loan debt that would have been cleared in three or four years can end up attached to a mortgage that runs for decades.

An illustrative example

Say you owe $40,000 across a credit card, a car loan and two smaller personal loans, at an average of 16% a year, and you're on track to clear it in four years. That's about $1,134 a month, and roughly $14,400 in interest.

• Moved into a 30-year home loan at 6.5%, the repayment drops to about $253 a month. But over 30 years, the interest comes to roughly $51,000, more than three times as much
• Moved into the same loan, still paying $1,134 a month, the debt is gone in about three years and three months, with roughly $4,500 in interest

Same debt, same new rate. The difference is entirely in how long you take to pay it off. (Illustrative only: it assumes fixed rates, monthly repayments and no fees.)

Run your own numbers in the consolidation calculator.

When it tends to help

• The new rate is meaningfully lower once fees are included
• You keep the term short, or keep paying close to what you paid before
• You close the cards and accounts you've cleared, rather than leaving the limits open
• The debts are the problem, not the spending that created them

When it tends not to

• It stretches short-term debt over decades
• Fees and break costs eat up the difference in rates
• It moves unsecured debt onto your home without a clear reason
• The repayments still don't fit the budget after consolidating

Ask what it costs, whoever you ask

Some businesses that advertise debt help charge substantial fees, and Moneysmart's advice is to check the fees and the alternatives first. That applies to anyone you speak to, including us. Free, independent financial counselling is available through the National Debt Helpline on 1800 007 007, and if you're struggling with repayments, your lenders have to consider a request for a hardship arrangement.

Where we come in

We lay out every debt side by side, cost the options over their full term, and arrange the consolidation where it genuinely helps. Where it doesn't, we'll say so. More on debt advice.

General information only. This article does not take into account your objectives, financial situation or needs, and it is not personal financial, legal or taxation advice. Lending criteria, fees and conditions apply, and all applications are subject to lender assessment and approval.