Is it a good idea to get a loan to pay off another loan?

It's hard to make ends meet when you're struggling with debt, but taking out a new loan to pay off an existing one could be an option, but with careful consideration. Debt consolidation loans and other forms of debt consolidation — like balance transfer credit cards and home equity loans — come with their own risks.

What is Debt Consolidation?

Managing multiple debts simultaneously can prove to be daunting and complex. Consolidating your debts can assist in amalgamating all your current liabilities into a singular loan, thereby providing you with enhanced management of your finances.

A prevalent method to achieve this consolidation is through securing a new personal loan and utilising its proceeds to settle your other outstanding debts. Subsequently, you would repay this consolidated loan through a unified series of payments over a predetermined period, reassuring you of knowing precisely when and what amount your payments will be.

How does Debt Consolidation Work?

Imagine you're juggling debts from two credit cards, one with a $4000 balance and the other with $5000, alongside a personal loan carrying a $9000 debt. Each debt typically comes with its own interest rate, repayment schedule, and due date, complicating your ability to manage them effectively.

To streamline your finances, consider consolidating these debts into a single personal loan. This approach means you'll only need to handle one recurring payment throughout the loan's term, benefiting from a consistent interest rate.

If the interest rate of the new personal loan is lower than that of your existing debts, it could even accelerate your progress towards reducing your total debt.

Utilising a personal loan repayment calculator can assist in estimating your potential repayment amounts.

Knowing the costs of taking out a new loan

Taking out a loan to pay off another loan requires careful planning. There are costs associated with any loan, namely the interest rate and fees. The interest rate is typically expressed as an annual percentage rate (APR). This is the amount of interest you pay each year if you don’t pay more than your minimum payment each month.

To calculate how much interest you will need to pay, multiply your outstanding balance with your APR. An example would be multiplying $1,000 by 10% (0.10) to get $100 in interest charges in a year.

Fees that could increase your total debt include:

  • origination fee
  • late payment fee
  • prepayment fee

How to create a debt consolidation plan?

Because we've all been there, it's important to remember that it's not so much a mistake as a learning experience. We all make mistakes, but you can learn from this one and move on. To do so, create a debt consolidation plan.

To start your debt consolidation plan: make a list of all your debts (including the interest rate and repayment terms) and work out how much you can afford to pay each month. Next, consider which debts are worth paying off with your loan (or whichever method you're using).

When you should consider consolidating your debt?

You should consider consolidating your debt if you meet one or more of the following criteria:

  • You have multiple loans with different interest rates, and it would be easier for you to handle the debt if all of it was consolidated into a single loan with a single interest rate. This can reduce confusion, especially if you're juggling several payments on different dates each month and find yourself missing payments. In addition, having fewer lenders to keep track of can help simplify your financial situation and reduce the chance that you'll miss a payment.
  • You want to secure a lower interest rate on your debt. For example, if you have multiple high-interest loans such as credit card debt that charge over 10% APR (or higher), taking out a new loan at a lower interest rate could help save you money in the long run by reducing the amount of interest charged on what you owe.
  • You want to simplify your monthly payments. If you have several loans with several different due dates each month, consolidating them into one loan with one due date may make it easier for you to remember when and how much to pay each month.

If paying off debts is the main motivation for getting a loan, speak to one of our brokers after you've submitted your loan application

If you've decided that getting a loan to pay off another loan is the right choice for you, it's important to talk to one of our brokers. It's also important that you do your research, because ultimately it's up to you and not anyone else to make the final decision. After all, no one knows your personal financial situation better than yourself!

While speaking with us, we may be able to help identify any risks associated with this type of loan. It's not just about brokering a loan at, our brokers are ultimately here to assist you in the best way possible. We can help outline some of the benefits and costs involved in taking out a second loan. If paying off debts is the main motivation for getting a loan, they may also be able to suggest other alternatives that could potentially make more sense given your current circumstances.

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