The contents provided on this page are for informational purposes only and do not constitute financial advice. Consider your personal circumstances and objectives before making any financial decisions.
|
TL;DR
|
Paying off a loan with a loan can seem counterintuitive.
But used thoughtfully this type of borrowing, often known as debt consolidation, can actually help you pay less in the long run (depending on your individual circumstances).
Instead of juggling multiple repayments, you take out a new loan and use it to repay existing debts. This leaves you with one balance, one interest rate, and one regular repayment.
People do this to:
But while it can help in some situations, it’s not always the best option. The key question is whether the new loan actually improves your overall financial position.
Consolidating debt may help when the new loan offers clear advantages over your current debts. You might consider this option if:
Moving high-interest debt (like credit cards) to a lower-rate loan may reduce the total amount you repay, especially if you have multiple sources of debt.
Before moving forward, it’s important to compare interest rates, fees, and repayment terms across lenders and add up the total.
Determine what will this loan/interest rate cost me in 3 months, 6 months, 12 months?
Putting tangible numbers to each expense, not just terms and fees, can help with comparison.
Managing several loans can make budgeting difficult. Combining them into one payment may make it easier to stay on track.
Some loans allow structured repayments over a fixed term, which can help with planning and managing your finances.
While using a loan to pay off a loan is great for simplifying debt, it doesn’t automatically reduce your debt.
In some cases, it can actually increase the total cost of borrowing.
It may not be ideal if:
Taking a moment to review your budget or spending patterns may help ensure the new loan doesn’t create additional pressure later. You can take action with your eyes wide open.
To help you do just that, we dove into 6 key questions to ask yourself before taking out a loan.
Imagine you currently have:
Instead of managing two repayments, you take out a $5,000 consolidation loan at 10% interest.
| Let’s break it down with tangible numbers over an assumed 12 month period: 3000 x 20% = $600 2000 x 12% = $240 Total: $840 per year in interest. Or 5000 x 10% = $500 Total: $500 per year in interest |
Same loan amount, a significant difference in savings.
But keep in mind that a combined loan may take longer to pay off and longer loan terms can result in a higher total interest.
That’s why it can help to look at the total cost over the life of the loan, not just the monthly repayment.
Sometimes the issue isn’t having multiple loans or sets of expenses, it’s timing.
For example, a bill may arrive before your next payday or before you’ve finished paying down another debt.
In those cases, a small short-term loan might help bridge the gap while you continue working on reducing your overall debt.
Beforepay’s Pay Advance allows eligible customers to borrow up to $2,000 and repay it across instalments within a set period, with low fees.
Some people use options like this to:
As with any borrowing, it’s important to consider whether the repayments will comfortably fit your budget.
Ask yourself:
Taking the time to compare options can help you make a decision that supports your financial goals.
You could even search for hidden leaks or costs that lie within your budget, and which could be an extra source of income to start paying down loans more efficiently.
Yes, it’s fairly common to use a loan to pay off another loan, but it depends on your individual circumstances. We recommend speaking with a financial professional before making a decision.
If the new loan doesn’t clearly improve your situation, either through lower interest or a reduced cost, it may be worth exploring alternatives like budgeting adjustments, payment plans, or smaller borrowing options, like Pay Advance.
Learn how Beforepay Pay Advance works
Not ready to borrow right now?
Explore more guides to help you manage debt and control your finances.
Not necessarily. It depends on whether the new loan improves your situation—for example by lowering interest or simplifying repayments. It’s simply another type of financial strategy.
This is usually called debt consolidation.
Applying for a loan may involve a credit check, which can affect your score. However, successfully managing repayments may help improve your credit over time.
In some situations, a smaller short-term loan may help clear or reduce high-interest balances, depending on the amount and repayment terms.
Disclaimer: Beforepay Group Ltd, ABN: 63 633 925 505. Beforepay allows eligible customers to access their pay and provides budgeting tools. Beforepay does not provide financial products, financial advice or credit products. The views provided in this article include factual information and the personal opinions of relevant Beforepay staff and do not constitute financial advice. Beforepay and its related bodies corporate make no representation or warranty, express or implied, as to the accuracy, completeness, timeliness or reliability of the contents of this blog post and do not accept any liability for any loss whatsoever arising from the use of this information. Please read our Terms of Service carefully before deciding whether to use any of our services.