Debt is a normal part of modern life, but managing multiple credit cards, personal loans, and other financial commitments can be stressful. One option Australians often consider is a debt consolidation loan—rolling several debts into a single repayment, usually with a lower interest rate or a more manageable schedule. While this can be useful, it is not a one-size-fits-all solution. Regulators such as the Australian Securities and Investments Commission (ASIC) stress the need for caution and informed decision-making.
This article will explore the basics of debt consolidation loans, what ASIC says about them, the risks to watch for, and why professional advice is essential.
What Is a Debt Consolidation Loan?
A debt consolidation loan is when you take out a new loan to pay off multiple existing debts. Instead of juggling three or four repayments, you combine them into one. The consolidated loan can be:
- A personal loan (secured or unsecured)
- A home loan refinance (using equity in your property)
- A specialised consolidation product offered by some lenders
The main attraction is simplicity and the potential to reduce the total interest rate paid. For example, if you’re paying 18–20% on a credit card but consolidate into a loan at 10%, the cost of servicing your debt may fall.
What ASIC Says About Debt Consolidation
ASIC, through its consumer website Moneysmart, outlines both the potential benefits and the risks of debt consolidation.
Benefits highlighted by ASIC:
- Lower interest rate compared to credit cards or payday loans
- Easier to manage one regular repayment
- Potential to pay off debt faster if repayments are consistent
Risks ASIC warns about:
- Extended loan terms can mean paying more interest overall, even at a lower rate
- Consolidating into a home loan can put your property at risk if repayments are missed
- Fees and charges on the new loan can offset savings
- Poor credit behaviour may continue if spending habits aren’t addressed
ASIC’s guidance makes it clear: debt consolidation can help—but only if done correctly .
When Debt Consolidation Can Be Beneficial
Debt consolidation can make sense when:
- You secure a lower interest rate – Consolidation is effective if the new loan’s rate is significantly below what you’re currently paying.
- You can maintain discipline – A lower repayment doesn’t mean you should spend more elsewhere.
- You simplify your finances – Having one repayment can reduce missed payments and late fees.
- You set a clear end date – Fixed-term loans with set repayment schedules help prevent rolling debt over indefinitely.
When to Exercise Caution
There are clear warning signs that debt consolidation may not be right for you:
- Longer loan term traps: If you refinance a credit card balance into a 25-year home loan, you may pay more over time.
- Hidden fees: Application fees, exit fees, and mortgage discharge fees can add up.
- Risking your home: Turning unsecured debt into secured debt against your home can raise the stakes if financial troubles continue.
- Unlicensed lenders: ASIC warns that Australians must check that any lender is properly licensed and regulated .
Step 1: Contact Current Credit Providers
Before consolidating, ASIC recommends speaking with your current credit providers. Many lenders are open to restructuring repayment plans or offering hardship arrangements. For example:
- Credit card issuers may allow lower minimum repayments
- Personal loan providers may extend repayment terms
- Utility and phone companies often offer payment plans
This step may solve your problem without needing a new loan or refinancing.
Step 2: Be Cautious with Home Loan Refinancing
Using your home loan to consolidate debt is tempting, especially when mortgage rates are lower than personal loan or credit card rates. However, ASIC highlights key concerns:
- Mortgage extension costs: A small debt consolidated into a long mortgage term can multiply total interest paid.
- Discharge and entry fees: Refinancing often carries costs that can outweigh savings.
- Repossession risk: If you default, your home is on the line.
Example: Rolling a $20,000 personal loan at 12% over 5 years into a 25-year home loan at 6% could save you on monthly repayments—but you’ll pay nearly double in total interest over time.
Step 3: Compare Interest Rates, Fees, and Charges
Not all debt consolidation loans are created equal. When comparing offers, check:
- Interest rate (fixed vs variable) – Fixed rates give certainty, while variable rates may rise.
- Comparison rate – This includes fees and gives a better measure of actual loan cost.
- Upfront and ongoing fees – Establishment, exit, late payment, and account keeping fees.
- Flexibility – Ability to make extra repayments or pay off early without penalty.
ASIC requires lenders to disclose all relevant charges in a clear format, but consumers must take the time to read and understand them .
Step 4: Check the Lender’s Credentials
One of the most important steps is confirming the lender is licensed by ASIC. Unlicensed operators may offer loans with unfair terms or illegal practices.
You can search the ASIC Connect Professional Registers to verify whether a lender or mortgage broker holds a credit licence or is an authorised credit representative .
The Role of Financial Advisers and Mortgage Brokers
While general information is helpful, debt consolidation decisions should be tailored to your circumstances. This is where professionals come in.
Financial Advisers
- Assess whether consolidation aligns with your long-term goals
- Provide budgeting strategies to avoid re-accumulating debt
- Offer advice on alternatives, such as hardship arrangements or debt agreements
Licensed Mortgage Brokers
- Compare home loan refinancing options across multiple lenders
- Explain differences in fees, comparison rates, and loan flexibility
- Help navigate ASIC licensing requirements
ASIC stresses the importance of ensuring advisers and brokers are licensed. This protects consumers by holding professionals accountable under Australian law .
Alternatives to Debt Consolidation
Consolidation is not always the best path. Alternatives include:
- Debt management plans through not-for-profit organisations like the National Debt Helpline
- Hardship variations negotiated directly with lenders
- Bankruptcy or formal debt agreements, in severe cases
These options may protect assets or provide more realistic repayment terms, depending on the situation.
Practical Tips for Australians Considering Debt Consolidation
- List all debts – Amounts, interest rates, repayment terms.
- Calculate total costs – Use ASIC’s loan calculators to see long-term outcomes.
- Talk to current providers – Negotiate before refinancing.
- Seek licensed advice – A financial adviser or mortgage broker can assess your options.
- Avoid quick fixes – Be wary of “too good to be true” offers.
- Commit to repayment discipline – Consolidation only works if you avoid new debt.
Conclusion
Debt consolidation loans can be a powerful tool for simplifying debt and reducing interest costs, but they come with significant risks. ASIC is clear: these loans are only beneficial when consumers understand the terms, compare options carefully, and avoid extending debt over longer periods unnecessarily.
The best approach is to start by talking to current credit providers, compare interest rates and fees closely, and confirm that any new lender is ASIC-licensed. Just as important, seek professional advice—whether from a financial adviser for overall strategy or a licensed mortgage broker for loan structuring.
Handled carefully, debt consolidation can provide breathing room and a clear path out of debt. Misused, it can leave Australians worse off in the long run.
References
- ASIC Moneysmart – Debt consolidation and refinancing
https://moneysmart.gov.au/managing-debt/debt-consolidation-and-refinancing - ASIC – Managing credit
https://asic.gov.au/regulatory-resources/credit/ - National Debt Helpline – Debt options
https://ndh.org.au/debt-solutions/ - ASIC – Comparison rates explained
https://moneysmart.gov.au/loans/comparison-rates - ASIC Connect Professional Registers – Search for a credit licensee
https://asicconnect.asic.gov.au/ - ASIC – Financial advisers register
https://moneysmart.gov.au/financial-advice/financial-advisers-register
