Our Pick Of The Best Debt Consolidation Loans

Debt consolidation means combining multiple debts into one loan, with one regular repayment schedule, and one single interest rate. Simple, right?

Where it gets complicated is:

• Finding a lender that will offer you a personal loan if your existing debts have damaged your credit score.
• Finding a personal loan with an interest rate, fees and terms that are more favourable than existing debts.

You can secure a loan for the purposes of consolidating debt through a traditional bank or credit union, and a wide range of lesser-known online lenders.

There are also a number of private companies that offer debt consolidation services—but not all of them are licensed debt management providers, and some use blatantly dodgy or illegal tactics. The Australian Government’s MoneySmart site recommends checking that a company is licensed (via ASIC Connect) as either a ‘Credit Licensee’ or ‘Credit Representative’ before dealing with them.

We have researched some of the most popular debt consolidation banks and credit unions to come up with our top picks.

Note: The below list represents a selection of our top category picks, as chosen by Forbes Advisor Australia’s editors and journalists. The information provided is purely factual and is not intended to imply any recommendation, opinion, or advice about a financial product. Not every product or provider in the marketplace has been reviewed, and the list below is not intended to be exhaustive nor replace your own research or independent financial advice. For more information on how Forbes Advisor ranks and reviews products, including how we identified our top category picks, read the methodology selection below.

Note that we have ordered the top providers from lowest interest rate to highest.

When analysed more than 20 providers of debt consolidation loans to come up with our top picks. Our criteria included:

• Starting interest rate so we could determine how competitive the provider was for those with excellent credit scores.
• Comparison rate so we could determine the true cost of the loan.
• Whether the consumer had a choice of secured or unsecured loans
• Whether the rate was fixed or variable, with a preference on the former for consumer certainty
• What was the maximum that could be borrowed and over what time-frame.
• Customer reviews via Product Review.

We also looked at whether there were additional fees—be it early repayment, establishment fee, account-keeping fee—or bonus features, such as redraw facility and flexible payment options of weekly, fortnightly and monthly, and gave the company a score out of 50 for bonus fees and features.

Because the interest rates attached to personal loans are dependent on your credit rating, it’s difficult to award each provider a star rating. Instead we have opted to pick providers with good loan features and competitive starting rates, but it’s important to remember that your interest rate will be unique to you and depends on your credit history.

According to ABS figures, short-term loan borrowing by Australian households increased in the December 2023 quarter—equating to $700 million in debt—driven by “seasonal year-end spending”, e.g. Black Friday and Christmas splurging.

Aside from a mortgage, Australians typically accumulate debt through credit cards, store cards, personal and car loans, buy-now-pay-later (BNPL) and payday loans. Once you’ve acquired three or four different debts across different providers, you can be stretched thin trying to stay on top of multiple repayments and due dates.

Data from online loan matching platform Lendela finds that three in five debt consolidation loan applications are made by people in their 20s and 30s. The number of borrowers under 30 years-old jumped by 200% from May 2023 to May 2024.

Most borrowers looking to consolidate debt through the platform earn between $40k – $70k (65%), while around 10% of applicants have a healthy income of $100,000 or more. Most are renters but the number of borrowers with a mortgage increased considerably in the past year.

One of the biggest drivers seen by Lendela is the popularity of BNPL and payday loans—about one in three debt consolidation loans were primarily taken out for this reason.

“Australians are increasingly turning to debt consolidation loans to stretch the terms of their BNPL and payday loans from the typical 30 to 90-day terms to more manageable periods of 48 to 60 months,” according to Jake Osborne, Australia Country Manager at Lendela.

Osborne said that while many lenders were willing to restructure debts over longer periods, it was essential for borrowers to consider the total cost over the life of the loan.

“We encourage borrowers to seek options that genuinely improve their financial position, which means looking for consolidation loans that offer not just lower monthly payments but also competitive interest rates and loan terms that make financial sense in the long run.”

You consolidate debt by taking out a personal loan for the total amount of your combined debts. Like all personal loans, a loan used for debt consolidation:

• Attracts annual interest on top of the principal amount you borrow.
• May be secured by an asset such as your house, or unsecured. Unsecured loans will have higher interest rates as you’re seen as more risky.
• Must be paid off through regular repayments (e.g., weekly or monthly) over a set loan term, which is usually between 1-7 years.

Once you’ve received the loan amount, you’ll typically need to manually pay off all your other debts with other providers. Then you’ll have just one loan to repay.

Personal loans do tend to have lower interest rates than credit cards, BNPL and payday loans. If you have three debts with interest rates above 20%, consolidating to one personal loan with a 10% interest rate clearly represents better value.

But a major money-waster when consolidating debt is choosing a longer loan term to reduce the size of your monthly repayment, thereby paying more in interest overall. To effectively compare what you’ll pay in total, check out debt consolidation calculators online.

Pros of Debt Consolidation Loans

Paying down high-interest debts and switching your borrowed amount to a lower rate of interest is the number one advantage of debt consolidation loans. In turn, the benefits can include:

• Gaining a clearer repayment timeline with one schedule to follow, which can help motivate you to stick to your repayments.
• Saving money over the life of the loan when you secure a lower interest rate and stick to the shortest possible loan term, paying the debt down as quickly as possible.
• Reducing the monthly repayment amount. While this is usually achieved through a longer loan term, it can help you get your head above water short-term if needed.
• Improving your credit score by making it easier to consistently make your repayments on time.

Cons of Debt Consolidation Loans

To ensure the consolidation loan solves more headaches than it causes, you’ll need to carefully review the interest rate and other fees of the new loan against your current rates and fees. Downsides of consolidating your debt can include:

• Paying additional fees associated with taking out the new loan, including application fees, account fees, late payment and early repayment fees. Review all the costs beforehand.
• Paying more in interest over time when you extend the loan term. While the fortnightly or monthly payment might be smaller, you’ll accrue more interest.
• Not addressing poor spending habits and racking up more debt. For instance, if you consolidate credit card debt, but continue paying for expenses via credit.
• Putting assets at risk by moving from unsecured short-term loans to a secured personal loan. If you default, the asset you used as security—such as the family home—can be taken.

Like any loan, the likelihood of being approved will depend on your income, credit score and whether you have assets you can use as security.

Numerous BPNL/payday loans, credit card balance transfers and missing loan/bill repayments can all have a detrimental impact on your credit score. Ultimately, paying off outstanding balances and having fewer debts can help improve your credit score—but in the meantime, a poor credit score can mean you’ll be offered comparatively high interest rates on a debt consolidation loan.
If the rate on offer is still affordable and will be less expensive than repaying your current debts, it may be a good option. Be sure to thoroughly research each loan product to ensure you understand all the fees, terms and conditions.

You might consider using loan matching services (e.g., Lendela, Money Matchmaker, iSelect) that present you with loan offers from multiple lenders without counting as an ‘application’ that further impacts your credit score. Keep in mind, these platforms don’t compare loans across all possible lenders, just the panel of lenders they work with.

Common methods for managing debt that don’t involve taking out a debt consolidation loan include:

• Liaising directly with current credit providers to negotiate your repayments or loan terms.
• Transferring credit card balances to benefit from a ‘no interest’ period to pay down the debt.
• Refinancing a home loan to get a better rate and save money that can be used to pay debts.
• Talking with credit/loan providers about hardship supports including repayment pauses.

If you’re struggling to weigh your options, you can speak with a financial counsellor for free by contacting the National Debt Helpline on 1800 007 007.