What is debt consolidation?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Debt consolidation is combining several loans or other debts, such as credit card balances and smaller loans, into a single new debt. A new loan pays out the existing balances, leaving one lender, one repayment and one balance to manage. It is usually done with the aim of lowering the interest rate or fees.
In the books, a consolidation is a set of linked entries. The new loan is recorded as a liability for the full amount borrowed, each old debt it pays out is reduced to nil, and any fees charged for setting up the new loan are recorded when they are charged. Checking each old account against the lender's closing statement confirms that it really has been paid out, with no leftover interest or fees still owing.
Consolidation changes how the debt is repaid, and often who it is owed to, but on its own it does not reduce what is owed. The new loan carries the old balances forward, plus any set-up fees, and it may run over a different period. Updating the cash flow forecast with the new repayment amount and term shows what the change means for the months ahead.
In Australia
business.gov.au's glossary describes debt consolidation as merging a number of debts into one, with the aim of paying less in interest or fees. It gives refinancing, paying off one loan with a new one, an entry of its own.
Its guidance on improving cash flow mentions combining existing debts into one product as one of the ways a business can review its costs. Its guide to managing debt suggests prioritising debts, using a budget to direct money where it matters most, and talking early to the organisations you owe money to.
Worked example
| Account | Balance before (AUD) | Balance after (AUD) |
|---|---|---|
| Business credit card | 4,600.00 | 0.00 |
| Equipment loan | 9,850.00 | 0.00 |
| Supplier finance account | 3,150.00 | 0.00 |
| New consolidation loan | 0.00 | 17,600.00 |
| Total owed | 17,600.00 | 17,600.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Recording the new loan but leaving the old loans open in the books, so the debt is counted twice.
- Closing an old account in the books without checking the lender's final statement for leftover interest or fees.
- Treating the consolidation as a fall in debt, when the old balances are still owed, now under one new loan.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Improve your cash flow
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Manage being in debt
business.gov.au, Australian Government. Current at 16 October 2026, released 20 February 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.