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Debt Consolidation | What You Need to Know

Debt Consolidation allows you to combine multiple debts into a single loan. Find out if this is right for you.

09 March 2022Lloyd Smith 7 min read
Debt consolidation

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Paying off multiple debts at the same time can be both complicated and challenging. Debt consolidation can help you to collate all of your existing debts into one loan which can in turn offer you a better control over your financial situation.

Let's take a look at everything you need to know about debt consolidation:

Debt consolidation is defined as taking out a new loan in order to pay off other consumer debts and liabilities. In other words, you combine multiple debts into one large debt like a loan and pay it off with a more favourable repayment term like lower monthly payments, lower interest rate, or both. It can be especially helpful for paying off old loans, credit card debt, student loan debt, and other liabilities.

The debt consolidation can be done in the form of a loan or even a new credit card.

Debt consolidation works by using different types of financing to pay off other debts. In case you have been burdened with different kinds of debt, you can apply for a new loan that consolidates all the debt together into just one single liability. You will then be required to make payments for the new debt until you have paid it in full.

The first step for consolidating your debt is applying for a loan with a bank, credit card company, or credit union. If you have a good payment history and credit score, you are bound to get approved for the new loan and get favourable conditions as well. In case your application gets turned down, you can also apply to other private lenders and mortgage companies which may end up offering you the loan but at a higher interest rate.

Lenders are willing to offer debt consolidation loans for many reasons. For starters, debt consolidation increases the loan amount and also increases the likelihood of collecting from the debtors.

Debt consolidation is the process of combining all your debts into one loan. This loan is usually at a lower interest rate and has a longer repayment period.

There are two ways that it can be done:

  • Debt Consolidation Loan: You take out a new loan to pay off your existing debts
  • Debt Settlement: You negotiate with the creditors to reduce the amount you owe them and even potentially get the interest rate lowered.

Note that debt consolidation can help you save money on interest payments, but it may not be the best option for everyone.

The loan that you take to consolidate all of your different high-interest debts and loans into one is called a debt consolidation loan. The idea is to pay off your entire range of debts through one affordable loan and in turn make it easier to repay the loan.

Debt consolidation loans

Many banks, financial institutions, and lenders offer debt consolidation loans and make payment programs for borrowers that might be struggling to deal with the sheer size and number of their existing outstanding debt. These loans are specifically designed to make it easier for people who need to pay down multiple high-interest debts together.

Credit cards

Getting a new credit card is also a good idea to consolidate debt and pay it off together through a new card. You can choose to get a balance transfer credit card to transfer all of your existing balance to a new card, preferably at a rather low introductory interest rate.

Just like with the other types of debt consolidation options available, balance transfer cards also result in a single payment and it can greatly reduce your overall debt cost by lowering the interest rate. In some cases, you may even get a 0% rate as an introductory offer.

Though, before transferring to a new credit card, you should also look out for other costs like balance transfer fees, the available interest rate, and the new interest rate that will be applicable after the introductory period is over.

Student loan programs

It's also possible for people with student loans to get consolidation options with a new interest rate that is the weighted average of the previously taken loans. Though, note that this loan may not be available for everyone.

Debt consolidation which combines multiple debts into a singular loan is more likely to increase your credit scores in the long run since it helps you off your pending debt. So yes, debt consolidation affect your credit score in some way. You may see your credit score go down for a short while just as the debt consolidation loan starts.

But as long as you can make your payments on time and you don't end up building more debt over your existing one, it should all be okay.

Some of the reasons why your credit score drops when you are consolidating debt, include:

  • Applying for a new line of credit: When you apply for a balance transfer card or a personal loan, the lender will always perform a hard inquiry against your credit report to assess your creditworthiness. Too many applications for a new line of credit in a short span of time can lead to a decrease in your credit score.

  • Opening a new credit account: When you open a new credit account, it ends up temporarily lowering your credit score for a while. That is because the new credit line is assumed as a risk by lenders.

  • A decrease in the average age of credit: As all of your credit accounts get older and show a positive account history of timely payments, your credit score inevitably rises. But when you open a new account, it ends up lowering the average age of credit which can lower your credit scores.

But those are only some short-term consequences. Here are some long-term benefits from consolidating your debt and why you should consider debt consolidation:

Lower credit utilisation ratio: It is the ratio that measures the total amount of credit you are using versus the total credit that is available to you. When you get a new loan or credit card approved, it decreases your credit utilisation ratio which in turn leads to an improved credit score.

Better payment history: It might take some time, but as you start to pay timely payments on your new loan, your credit scores will start to slowly and steadily increase. After all, the payment history is one of the biggest factors that end up influencing your credit file in the long run.

1 - Routinely check your credit score

Lenders always end up basing the main loan decision as well as the loan conditions upon the credit score. In order to get approved for a debt consolidation loan, you will have to first be eligible for the minimum requirement set by the lender.

While some lenders may accept applicants with bad scores, most don’t. And even if you end up getting approved with a low credit score, you may get stuck with a high interest rate.

Moreover, applying for too many debt consolidations for bad credit in a short span of time can further lower your credit scores.

That is why, you need to first check your credit scores to assess which loan programs you qualify for and which ones you just don’t.

2 - Shop around for loan offers

It's never a good idea to accept just about the first loan offer that you end up getting. Instead, you should do your own research in order to compare all the different repayment terms, loan amounts, and fees involved for different banks, credit card providers, and online lenders. While the process can surely take some time, it can help you save hundreds or even thousands of dollars.

Once you have already checked your credit score, you can check out all the different lenders and then compare the offers along with the likelihood of you getting approved.

3 - Consider getting an unsecured loan

The personal loans that you get for debt consolidation are unsecured, which means they don’t require you to put any collateral against them. In case you are struggling to get approved for an unsecured loan at an affordable interest rate, you can apply for a secured loan instead.

With secured loans, you will be required to put some kind of asset as collateral like your home or vehicle. Ideally, the collateral’s worth should be equal or more than the loan amount you are trying to get approved. It is usually easier to get approved for a secured loan than an unsecured loan and you may even be able to get a lowered interest rate.

4 - Wait and improve your credit

If you have tried everything there is and you still can’t get approved for a debt consolidation loan that can actually help save you money, it may be best to hold off for a while.

You can instead work towards establishing a better credit score and then apply later with a higher score on your credit file.

If you have credit card debt, you can focus on paying it first and lowering your monthly expenses. The goal should be to lessen your debt as much as you can by getting a debt consolidation loan.


  • Allows you to manage your debt effectively by combining all the pending loans together into a single one
  • Can possibly lower your total interest rate by consolidating all the debt into a low interest personal loan or even a zero-interest balance transfer credit card
  • Lower down your overall monthly payment by extending the overall period of the loan to make it easier to pay off all the debt
  • Pay your debt sooner through fixed and consolidated monthly repayments


  • You may have to pay a balance transfer fee, closing fee, loan origin fee or any other overhead costs involved
  • If you can’t get an unsecured loan, you may have to get a secured loan by putting an asset as collateral
  • Debt consolidation does not always guarantee a lowered interest rate, especially if your credit score is already low
  • When you have a longer repayment period, it can eventually lead to a higher cost
  • If you don’t eventually improve in the money management area, your debt will end up accumulating even more

If you have a lot of debts and you have been having a hard time keeping track of all the different rates of interest and monthly repayments, consolidating your debt into one can make it easier for you to manage your finances well and clear your debts faster.

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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.