What is debt consolidation?

Debt consolidation is a refinancing strategy where you combine multiple, higher-interest, existing debts into a single lower-interest loan. Doing this can make your repayments easier to manage and save you money.

Your repayments will be easier to manage because you’ll only have to make one regular repayment amount to cover all your debt, rather than having to make multiple loan repayments. This can make it easier for you to budget to meet all your expenses.

You can save money with a debt consolidation loan by paying less interest. It’s important to understand that different types of finance have different interest rates. High-interest finance includes credit cards, personal loans (especially unsecured personal loans) and car loans. Credit card interest rates are notoriously high.

Home loans on the other hand are a cheap form of finance. This makes them ideal for debt consolidation loans. However, it’s not your only option. As long as your debt consolidation loan has a lower interest rate than the debts you’re consolidating, you can save money.

How debt consolidation home loans work

A debt consolidation home loan combines all your existing debts into your low-interest home loan. This is an effective strategy when:

You have built up a level of equity (ownership) in your home over time. For example, through it increasing in value and/or you making your regular repayments. You can then borrow against that equity to consolidate your high-interest debts.


Suppose you owe $400,000 on your home that’s worth $600,000 and that your hone loan interest rate is 4%. Your equity would be $200,000 (i.e. $600,000 less $400,000).
Also assume that you owe $50,000 on personal loans and credit cards at an average interest rate of 10%. You can take out a debt consolidation home loan to incorporate the additional $50,000 debt at your lower 4% home loan rate.

You increase your home loan repayments to cover the consolidated debt.

You don’t get any further into debt.

The pros and cons of debt consolidation loans


They can:

  • make your repayments easier to manage.
  • result in you paying less interest.
  • lower your repayments, especially if you extend your loan term (however, it’s important to understand that this option should be a last resort as it results in you paying more interest in the long run).


  • debt consolidation loans can turn short-term debt into long-term debt if you extend your loan term.
  • usually, fees and charges apply on a debt consolidation loan (for example, a loan establishment fee if you’re not borrowing against the equity you have in your home).
  • they can encourage you to get into more high-interest debt (for example, credit card debt) if you’re not financially disciplined.

Debt consolidation loan FAQS

Is it a good idea to get a debt consolidation loan?

It’s a good idea to get a lower-interest debt consolidation loan if you’re struggling to repay multiple debts at high interest rates. The alternative is to miss repayments, which can hurt your credit score and potentially see you get assets repossessed if you have a secured loan.

Do consolidation loans hurt your credit score?

Every time you apply for credit, your credit score can temporarily drop slightly. However, if you then start making all your repayments on time and reduce your overall level of debt, your credit score will improve. It’s easier to do that with a low-interest debt consolidation loan.

What credit score do I need for a debt consolidation loan?

This depends on the lender’s criteria, but you will usually need a credit score of around 650 or higher. You may be able to get a debt consolidation loan with a lower score, but you’ll usually be charged a higher interest rate.

You can check your credit score for free with credit reporting agencies like Experian before you make your debt consolidation loan application.

What is the smartest way to consolidate debt?

The smartest way to consolidate debt is to avoid extending your debt or credit term unless it’s absolutely necessary. In other words, don’t turn short-term debt into long-term debt just to lower your repayments. If you do, you’ll end up paying more interest in the long run, even with a lower interest rate on your debt consolidation loan.

You should continue with the same overall debt repayment amount when you take out a consolidation loan. This will allow you to pay off your debt faster and to pay less interest. A debt consolidation loan is a good strategy if you’re committed to reducing your overall debt level.

What are pa comparison rates?

pa’ is an acronym that stands for ‘per annum’, which means ‘per year’. A ‘comparison rate’ is the cost of interest plus any loan fees and charges. You should always use the comparison rate when evaluating the total cost of different loan products. The loan with the lowest comparison rate is the cheapest.

How much can you save with a debt consolidation loan?

This depends on a range of factors including the:

  • loan amount,
  • loan terms and conditions, and
  • the comparison interest rate on your consolidation loan versus the rates on your other debts.

 The table below shows the annual interest charged on $50,000 worth of multiple debts at a range of loan interest rates. As you can see, a lower interest rate makes a significant difference.


Debt Annual interest
(10% comparison rate)
Annual interest
(7% comparison rate)
Annual interest
(4% comparison rate)
$50,000 $5,000 $3,500 $2,000

How do you get a debt consolidation loan?

Choosing the right lender and the right debt consolidation loan is crucial.  

At ARG Finance, our experienced team of finance brokers can help you to make the right decision. We’ll take the time to understand your needs and financial situation before recommending a suitable debt consolidation solution.

Contact us today to find out how we can help you to consolidate your debts and make your life easier!