Consolidation Loans – Fear of Credit Damage? (2026)

If you're feeling overwhelmed by multiple debts, you're not alone. Juggling various repayments can be stressful and financially draining, but there's a potential solution: debt consolidation. However, many Australians wonder, "Do consolidation loans hurt your credit?" Let's delve into the details to help you make an informed decision.

Understanding Consolidation Loans

Debt consolidation involves combining multiple debts into a single loan with a singular monthly repayment, ideally at a lower interest rate. This financial strategy can simplify your finances and potentially reduce the overall cost of your debt. However, it’s essential to understand how it works and its potential impact on your credit score.

Interest Rates, Requirements, and Options

In 2026, interest rates for consolidation loans in Australia typically range from 6.49% to 12%, depending on factors like credit score, loan amount, and repayment terms. Lenders analyse your financial situation to determine eligibility, focusing on factors such as:

• Credit score: Generally, a score above 650 improves your chances of securing a favourable rate.
• Income stability: Consistent income is crucial for demonstrating your ability to repay the loan.
• Debt-to-income ratio: Lenders prefer a ratio below 40% to ensure you can manage repayments.

Here’s a comparison of different consolidation loan options available through Esteb and Co’s panel of 83+ lenders:

How to Consolidate Your Debt

To effectively consolidate your debt, follow these steps:

1. Assess Your Debts: Calculate the total amount owed and the interest rates on each debt.
2. Check Your Credit Score: Obtain a copy of your credit report to understand your credit status.
3. Research Lenders: Compare offers from various lenders, focusing on interest rates and terms.
4. Apply for a Loan: Provide necessary documentation and complete the application process with your chosen lender.
5. Pay Off Existing Debts: Use the funds from your consolidation loan to pay off existing debts.
6. Manage the New Loan: Set up automatic payments to ensure timely repayments and avoid negatively impacting your credit score.

Tips and Considerations

While consolidation loans can be beneficial, consider the following:

• Impact on Credit Score: Initially, applying for a new loan may slightly lower your credit score due to the hard inquiry. However, consistent on-time payments can improve it over time.
• Loan Fees: Be aware of any origination fees or early repayment penalties associated with the loan.
• Spending Habits: Avoid accumulating new debt while repaying your consolidation loan to ensure long-term financial health.
• Professional Advice: Consider consulting a financial advisor to explore all options before proceeding.

Frequently Asked Questions

1. Will a consolidation loan affect my credit score? Yes, initially it may decrease slightly due to a hard inquiry, but over time, consistent payments can improve your score.
2. Can I consolidate secured and unsecured debts? Yes, but it's important to note that secured debts may have different terms and conditions.
3. Is a consolidation loan the best option for everyone? Not necessarily; it depends on individual financial situations and should be considered alongside other options like budgeting or debt counselling.
4. How long does it take to consolidate debts? The process can vary, but typically it takes a few weeks from application to disbursement.
5. Can I include new debts in a consolidation loan? Generally, consolidation loans are intended for existing debts, but discuss options with your lender.
6. What happens if I miss a payment? Missing payments can damage your credit score and may result in late fees. It’s crucial to communicate with your lender if you encounter financial difficulties.