By Paul Feeney, Founder and Chief Executive Officer, Otivo
Debt consolidation has an obvious appeal, take several messy debts and roll them into one tidy repayment, ideally at a lower rate. For many people it genuinely helps. But it comes with a catch that's easy to miss, consolidating the debt doesn't clear it, and a lower monthly repayment stretched over a longer term can quietly cost more. Here's how to tell whether it's the right move.
Quick answer
Debt consolidation combines multiple debts into a single loan, ideally with a lower interest rate and one simpler repayment. It can reduce interest and make debt easier to manage, but stretching repayments over a longer term can increase the total interest paid. As at July 2026, consolidation works best alongside a plan to control the spending that created the debt.
What is debt consolidation?
Debt consolidation means combining several separate debts, such as credit cards and personal loans, into a single new loan with one repayment. Instead of juggling multiple due dates and interest rates, you deal with one. The aim is usually a lower overall interest rate and a simpler arrangement to manage. It's a restructuring of what you owe, not a reduction in it, which is the key thing to keep in mind.
What are the benefits?
The two main draws are simplicity and cost. One repayment on one loan is easier to manage than several, which reduces the risk of missing a payment. And if the consolidated loan carries a lower interest rate than the debts it replaces, you pay less interest along the way. For someone juggling several high-rate debts, bringing them together at a lower rate can make the whole situation more manageable and cheaper to service.
What are the risks and downsides?
The catch is in the term and the structure. A lower monthly repayment often comes from stretching the debt over a longer period, and a longer term can mean more total interest even at a lower rate. Consolidating unsecured debts into your mortgage can lower the rate but spread short-term debt across decades, and it may put your home behind debts that were previously unsecured. There can be fees to set up the new loan too. And crucially, consolidation doesn't fix the spending that created the debt.
When does consolidation make sense?
It works best in a specific situation, when you have multiple higher-rate debts, you can genuinely access a lower rate, and you have the discipline not to run the old debts back up. In that case, consolidating can cut interest and simplify your life at the same time. It makes least sense when it's used to lower repayments by stretching the term, or when the underlying spending habits remain unaddressed, since the relief is then temporary.
What should you check before consolidating?
Three things in particular. Check the new interest rate against the rates on your current debts. Check the term, and work out the total interest over the life of the new loan, not just the monthly repayment. And check the fees to set it up. Above all, be honest about whether the spending that built the debt is under control, since consolidation only helps if it's paired with that.
Frequently asked questions
Does consolidating debt hurt or help?
It can help by simplifying repayments and potentially lowering your interest rate, but it can hurt if a longer term increases the total interest you pay or if the underlying spending continues. The structure and your habits decide which.
Should I consolidate debt into my mortgage?
It can lower the interest rate, but it stretches short-term debt over the life of a home loan, which can increase total interest, and it may secure previously unsecured debt against your home. Weigh the total cost, not just the repayment.
Does debt consolidation reduce what I owe?
No. Consolidation restructures your debt into a single loan, it doesn't reduce the amount you owe. The benefit comes from a lower rate or simpler management, not from a smaller balance.
Where to from here
Consolidation can help, but only as part of a plan rather than a fix on its own. Otivo, a licensed Australian financial advice platform holding AFSL and Australian Credit Licence No. 485665, offers a debt advice module that helps you find effective ways to pay down debt while covering essentials, based on your debts, income and expenses. It helps you see whether consolidating fits your situation.
Sources
- ASIC MoneySmart — debt consolidation and refinancing — moneysmart.gov.au
Disclaimer
The information in this communication is current as at July 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.