Struggling with debt and a bad credit score? Find out everything you need to know about consolidation loans and if it's right for you.

In this article

• What is debt consolidation?

• What are debt consolidation loans?

• How does bad credit debt consolidation work?

• How to apply for debt consolidation loan with bad credit

• Things to consider when applying for debt consolidation for bad credit

• How does debt consolidation affect my credit scores?

• What credit score do you need for a consolidation loan?

• Is debt consolidation better than a credit card balance transfer?

• Final words

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Managing multiple debt repayments can be a nightmare for anyone who already has several high-interest loans. In such cases, a debt consolidation loan can be helpful for combining loans into one payment, as long as you only take on credit you can afford to manage and repay.

It can be especially useful to consolidate loans when you have bad credit as debt consolidation can help you to simplify your repayments to pay off your dues quickly and improve your credit score as well.

This guide tells you everything you need to know about debt consolidation in Australia :

What is debt consolidation?

Debt consolidation or consolidation of debt is a method of refinancing old debts that carry very high interest. You can combine or roll over multiple debts into a single debt and repay it on more favourable payment terms.

What are debt consolidation loans?

A debt consolidation loan is a personal loan that you can borrow for consolidating and paying off your old debts.

You can approach banks, credit card companies, credit unions, or financial institutions to apply for a debt consolidated loan. Usually, such loans offer a better interest rate or reduced instalment amounts, or both, making it an attractive option for those struggling to keep up with multiple debt repayment schedules. This can help you pay off your debt consistently, which over time may help improve your credit score.

You can opt for either unsecured or secured debt consolidation loans:

• Secured loans: For secured loans, you need to offer an asset as collateral for the loan that the lender can use in the event of non-payment. These loans are the easiest debt consolidation loans to get.

• Unsecured loans: These loans do not require any collateral. Consequently, they are harder to get and also carry higher interest rates.

How does bad credit debt consolidation work?

Before understanding how debt consolidation for bad credit works, let's look at the relationship between bad credit and multiple debts.

It is not unusual for borrowers with multiple debts to miss their existing loan repayments, resulting in a bad credit score. This can result in a tricky situation -- since debt consolidation loans are like any other personal loans, the lender checks your credit score to determine your creditworthiness. On average, lenders usually expect a credit score of around 650 to extend a debt consolidation loan. But when you have a lower credit score, getting the loan approval can be an issue.

That's where debt consolidation loans for bad credit come in handy. The minimum acceptable credit score for lenders offering debt consolidation loans with bad credit varies. However, offering collateral can make it easier for borrowers to get approved for such loans easily.

Usually, the interest rate of a bad credit debt consolidation loan may be higher than a regular consolidation loan. Even then, it can potentially help you save as the combined rate of your present debts may still be significantly more than the new interest payable.

What Types of Debt Can You Consolidate with Bad Credit?

One of the most common questions borrowers ask is which debts actually qualify for consolidation - especially when you have a low credit score. The good news is that most unsecured and some secured debts can be rolled into a single debt consolidation loan, even with bad credit. Here are the main types of debt you can typically consolidate in Australia.

Credit card debt

Credit cards are one of the most frequently consolidated debt types. Because they often carry interest rates of 18-22% or higher, rolling multiple credit card balances into a single loan at a lower rate can deliver meaningful savings - and a single monthly repayment is far simpler to manage.

Personal loans and payday loans

Existing personal loans and payday loans can usually be included in a consolidation arrangement. Payday loans, in particular, carry extremely high effective interest rates, so consolidating them into a longer-term loan with a lower rate is one of the best ways to consolidate debt with bad credit and reduce your overall cost of borrowing.

Medical and dental bills (including surgery finance)

Unexpected medical or dental expenses - including outstanding surgery finance - can quickly spiral. If you're wondering whether you can get a loan to pay for surgery or settle medical bills, a debt consolidation loan is one option. These debts are treated as general unsecured liabilities and most lenders will allow you to include them.

Buy now pay later (BNPL) balances

Afterpay, Zip and other BNPL balances can also be consolidated. While individual BNPL amounts may be small, multiple accounts add up and each missed payment can affect your credit score. Folding them into a consolidation loan removes the juggling act of staggered fortnightly payments.

Car loans and other secured debts

Secured debts such as car loans can sometimes be consolidated, though the process is more complex. You may need to refinance the secured debt separately or offer equivalent collateral under the new loan. Speak with your lender about whether your vehicle finance can be included in the arrangement.

Debts you generally cannot consolidate

Not every obligation is eligible. Government debts such as HECS-HELP student loans, child support arrears, court-imposed fines and ATO tax debts typically cannot be rolled into a private consolidation loan. These are repaid through separate government channels and have their own repayment frameworks.

How to apply for debt consolidation loan with bad credit

Like any other credit product, you will need to apply for a debt consolidation loan by filling up an application form. For most lenders, the standard eligibility criteria of an applicant are as follows:

• be 18 years or older,

• either be a citizen or hold proof of permanent residency; and

• have a source of income

Apart from your application, the lender will also review the information in your credit report and then decide whether to give you a loan and on what terms. Bear in mind that the exact requirements and process vary depending on which lender you approach.

Things to consider when applying for debt consolidation for bad credit

Securing consolidation loans for bad credit can be an uphill battle for many. Here's what you can do to boost your chances of getting approved:

Know your credit score before you apply

Lenders providing such loans still need to look at your credit score before deciding. The lower your score, the higher the interest charged. Knowing your score will make it easier to shortlist suitable lenders and secure a loan quickly.

Don't settle for the first lender who makes an offer

You may be in a tough spot managing multiple debt payments. Still, there's no reason to accept the first offer you get. Get offers from various lenders and compare their terms, especially interest, fees, and repayment amounts.

After all, consolidating debts should help you save money and not spend more.

Opt for a secured loan

To improve your odds, consider getting a secured debt consolidation loan. It is easier to get approved for a secured loan than an unsecured one, even with lower credit scores.

Depending on the value of your collateral, the lender may also offer you a better interest rate.

Try to improve your credit score and then apply

If you are absolutely unable to secure a good offer, start creating a short-term plan to improve your credit score. Cut down on non-essential expenditures to use the available funds for paying down the dues. Consistent payments will help you to improve your current score and negotiate better terms with the lender.

Moreover, you will come across as a more responsible borrower who has already taken the necessary steps to avoid falling into a debt trap.

Approach a credit union

Sometimes you may find it easier to borrow consolidation loans in Australia from local financial institutions or credit unions instead of approaching banks. These lenders may offer you better terms even when you have bad credit, especially if you have a pre-existing relationship with them. They may consider your entire financial history, circumstances, current source of income, and your institutional relationship before deciding on your loan application.

Be wary of payday lenders advertising no credit check debt consolidation loans, which in Australia are typically predatory and best avoided. These lenders do not perform any credit checks to approve financing. They only conduct soft inquiries to obtain background information. But beware -- the interest rates are often sky-high as the absence of credit score and credit history makes the lending riskier.

Secured vs Unsecured Debt Consolidation Loans Compared

Choosing between a secured or unsecured consolidation loan is one of the biggest decisions you'll make as a bad-credit borrower. A secured loan uses an asset - such as a car or property - as collateral, which typically makes it easier to get approved and attracts a lower interest rate. An unsecured loan requires no collateral but is harder to obtain when your credit history is poor. The table below highlights the key differences to help you decide which option suits your situation.

If you have bad credit and own an asset you're willing to use as security, a secured consolidation loan will almost always offer better terms. However, make sure you can comfortably meet the repayments - defaulting on a secured loan means the lender can repossess your asset.

How does debt consolidation affect my credit scores?

Initially, loan consolidation may impact your score adversely. When you close all your old accounts suddenly and open a single one, the length of your credit history reduces, bringing down your score. Moreover, every time you apply for a bad credit debt consolidation loan and the credit provider runs a credit check, it shows up on your credit file as a hard inquiry. Hard inquiries impact credit scores.

But debt consolidation helps you in the long run if you don't miss your payments and don't apply for new credit unnecessarily. Regular payments improve your payment track record, which, in turn, boosts your credit score. Additionally, since you pay lesser interest, it gives you the freedom to pay larger instalments and pay off the debt quicker. This can positively impact your score.

What credit score do you need for a consolidation loan?

Ideally, your Experian score (shown on ClearScore on a scale of 0-1,200) would sit in the “On good ground” band or higher. However, some lenders may accept lower scores.

It is best to know the credit score requirement of each lender before you apply for a debt consolidation loan.

Is debt consolidation better than a credit card balance transfer?

Credit card balance transfer is a method of debt consolidation. However, it is only available for debts due on credit cards. You can consolidate and transfer such debts to a single credit card. You can benefit by paying off your debt during the promotional period when the interest is usually zero or very low.

On the other hand, there is no interest-free period when you opt for debt consolidation through a loan. And unlike credit card balance transfer, the interest rate remains the same throughout the term of the loan.

Choosing between debt consolidation through loans and credit card balance transfer depends on your circumstance. If you have multiple high-interest debts, such as payday loans that are not linked to credit cards, opting for a debt consolidation loan is the best option. If you only have credit card dues that you want to consolidate, you should compare the terms of credit card balance transfer and debt consolidation loan and decide.

How Much Does a Debt Consolidation Loan Cost? Worked Examples

Understanding whether consolidation actually saves you money requires looking at real numbers. Below are two illustrative examples using rates typical of the Australian market for bad-credit borrowers. These are estimates only - your actual rate will depend on your credit profile, the lender, and whether the loan is secured.

Example 1: Consolidating $10,000 across three credit cards

Suppose you hold three credit cards with a combined balance of $10,000, each charging around 20% p.a. Paying those balances off over five years could see you paying close to $6,000 in interest. By consolidating into a single personal loan at 15% p.a. over a three-year term, your estimated monthly repayment would be roughly $347. Total interest paid drops to approximately $2,480 - a saving of around $3,500 compared with staying on the credit cards.

Example 2: Consolidating $30,000 across mixed debts

Now consider a borrower with $30,000 in combined debt: $18,000 on a personal loan at 18% p.a. and $12,000 across two credit cards at 21% p.a. If you're wondering how much a $30,000 personal loan would cost per month, a consolidation loan at 14% p.a. over five years works out to roughly $698 per month. Total interest over the term would be approximately $11,880, compared with an estimated $16,000-plus if the original debts ran their course. That's a potential saving of over $4,000, plus the convenience of a single repayment date.

Key cost factors to watch

The advertised interest rate is only part of the picture. Always check the comparison rate, which bundles the interest rate with standard fees to give you a truer cost of the loan. Look out for establishment fees (sometimes $150-$500), monthly account-keeping fees, and early-exit fees if you plan to repay the loan ahead of schedule. These charges can erode the savings you expect from consolidation.

When consolidation costs more than staying put

Consolidation is not always cheaper. If the only loan you qualify for carries a high interest rate - common for very low credit scores - the total cost over a longer term may exceed what you currently owe. Similarly, if your existing debts are close to being paid off, the new loan's establishment fees and interest may outweigh the benefit. Always compare the total repayable amount (principal plus all interest and fees) of the consolidation loan against the total remaining cost of your current debts before signing.

Debt Consolidation for Bad Credit: FAQs

Can I get a debt consolidation loan with extremely bad credit in Australia?

Yes, though your options will be more limited. Some specialist lenders and credit unions approve consolidation loans for borrowers with credit scores well below 500. You'll typically face higher interest rates and may need to provide collateral. It's worth checking your credit score first so you know where you stand, then comparing offers from multiple lenders before committing.

What is the easiest consolidation loan to get approved for?

Secured debt consolidation loans are generally the easiest to obtain because the collateral reduces the lender's risk. If you can offer a vehicle, term deposit, or other asset as security, you'll improve your chances of approval - even with a poorer credit history. Some credit unions also take a more holistic view of your finances, which can work in your favour if your score doesn't tell the full story.

What hurts my credit score the most when consolidating debt?

The single biggest factor is missed or late repayments - payment history is the largest component of your credit score. During the consolidation process, each formal loan application also triggers a hard inquiry on your credit report, which can temporarily lower your score. To minimise damage, avoid applying with multiple lenders in quick succession and ensure you keep up with all existing repayments until the new loan settles your old debts.

Can I consolidate debt without a credit check?

A small number of payday and short-term lenders in Australia advertise no-credit-check loans. These lenders typically perform only a soft inquiry for background purposes. However, the trade-off is significantly higher interest rates and fees, which can make the loan more expensive than the debts you're trying to consolidate. Treat no-credit-check options as a last resort and always compare the total repayable amount against your current obligations.

What happens if I default on a debt consolidation loan?

Defaulting on a consolidation loan has serious consequences. The missed payments will be recorded on your credit file, further damaging your score. If the loan is secured, the lender can repossess and sell your pledged asset to recover the debt. For unsecured loans, the lender may refer the debt to a collection agency or pursue legal action. If you're struggling to meet repayments, contact your lender as early as possible - most are required under Australian law to consider a hardship request before taking enforcement action.

Final words

To sum up, debt consolidation is about borrowing loans to pay off loans. It can be a boon if you are struggling with numerous high-interest debts. Even if you have bad credit, you can avail of such a loan to repay your dues.

Knowing your credit score is the first step to getting such a loan. With ClearScore, you can check your credit score for free anytime you want.