Debt consolidation

Debt consolidation is the strategy of combining multiple debts — typically credit cards, personal loans, and overdrafts — into a single new loan. The goal is usually to lower the average interest rate, reduce total monthly repayments, or simplify cash flow management.

How debt consolidation works

A borrower takes out one new loan large enough to pay off all the existing debts. From that point, only one repayment is owed, at one interest rate, on one schedule.

Example

A borrower has:

• $8,000 credit card at 22% APR
• $5,000 personal loan at 14% APR
• $4,000 store card at 26% APR

Consolidating into a $17,000 personal loan at 12% over four years could reduce monthly outgoings and save thousands in interest, provided the borrower stops adding to the original lines of credit.

When consolidation works

• The new loan rate is materially lower than the weighted average of existing rates
• Establishment and exit fees do not consume the interest saving
• The borrower commits to closing the original facilities — re-using paid-off credit cards is the classic failure mode
• The repayment term is not stretched too far — extending a five-year debt over ten years can mean lower monthly payments but higher total interest

Trade-offs

• Single repayment is easier to manage — reduces risk of missed payments
• May damage credit short-term — closing accounts and opening a new line shifts credit utilisation
• Secured consolidation loans put assets at risk — folding unsecured debt into a home loan converts it to secured debt with foreclosure exposure (see secured vs unsecured loan)

Always model the total cost — not just the monthly payment — before consolidating. The right tool depends on individual circumstances.