Pros and cons of debt consolidation


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If you have high-interest debt, consolidating it might make sense. Learn about the pros and cons of debt consolidation. (Shutterstock)

If you have high-interest credit card debt, are struggling to make loan payments, or find it difficult to keep track of multiple payment due dates, debt consolidation might be a good option, especially if Your credit score has improved since you took out your loans.

While consolidating high-interest debt with a personal loan or balance transfer credit card may make sense in certain situations, it’s not right for everyone. Let’s dive deeper into how debt consolidation works, as well as some pros and cons you’ll want to consider.

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What is debt consolidation?

Debt consolidation is when you take out a new loan and use the funds to pay off your original debt. You can consolidate debt with a personal loan, balance transfer credit card, home equity loan, or home equity line of credit (HELOC). Here are some common types of debt consolidation.

Debt consolidation with a personal loan

If you’re looking to consolidate debt with a personal loan, you can lower your interest rate, improve your loan terms, and streamline your monthly payments. You can find debt consolidation loans at banks, credit unions, and online lenders. If you can get a personal loan with a lower interest rate, you may find it easier to pay off your high-interest debt and get out of debt faster.

May compare personal loan rates from multiple lenders using Credible, and it won’t affect your credit score.

Debt Consolidation With A Balance Transfer Credit Card

When you consolidate credit card debt With a balance transfer credit card, you take out a new credit card, ideally with a low interest rate or an introductory offer of 0% APR for a certain period of time. Then you transfer your existing card balances to the new card and make a payment each month.

Debt consolidation with a home equity loan or HELOC

Debt consolidation with a home equity loan or a home equity line of credit (HELOC) may be an option if you have positive equity in your home (the difference between what you owe on your mortgage and the current value of your home).

If you’re approved for a home equity loan, you’ll receive a lump sum of money up front, and then you can use the cash to pay off your existing debts. Then, you’ll begin making home equity loan payments on the amount you borrowed, plus interest. HELOCs are also a type of second mortgage, but they are a line of credit that you can draw from as needed, up to your credit limit.

If you use one of these options to consolidate your debt, you may be able to get a lower interest rate than you would with a debt consolidation loan because your home will serve as collateral to secure the loan.

Advantages of debt consolidation

Some of The most notable advantages of debt consolidation include:

You can get a lower rate

The biggest advantage of debt consolidation is that you can secure a lower interest rate and save a lot of money on interest. Depending on the strategy you choose and the amount of debt you have, this could amount to hundreds or even thousands of dollars. You can use this extra money to pay off debt faster, increase your emergency fund, or reach any other short- or long-term financial goal.

You will have a single monthly payment

Keeping track of multiple monthly payment due dates is not easy. Debt consolidation allows you to combine your debts into one new monthly payment with a fixed interest rate that will stay the same for the life of the loan (or during the promotional period with a balance transfer card). Simplifying your debt repayment can give you a clearer path to debt relief sooner and make the process less overwhelming.

You can get out of debt faster

If you consolidate debt at a lower rate, you can use the money you save on interest to get out of debt faster. You’ll be able to invest the money you save in interest toward your remaining balance and shorten your payment term, which can help you save even more. To really speed up your mission to pay off debt, try getting a balance transfer card with an introductory 0% APR offer.

Cons of debt consolidation

Before going ahead with debt consolidation, consider these drawbacks:

You may have to pay fees

The lender and debt consolidation strategy you choose will determine what type of fees you may be responsible for. If you take out a personal loan, for example, you may have to pay an origination fee or an application fee to process the loan. Consolidation with balance transfer card usually comes with a balance transfer fee of 3% to 5% of the amount you’re transferring, while debt consolidation with a home equity loan may include closing costs.

You are not guaranteed a lower interest rate

In a perfect world, you could lock in a lower interest rate on a personal loan, balance transfer card, or home equity loan so you can actually save when you consolidate debt. But the reality is that the lowest rates are reserved for those with strong credit. If you have fair or bad credityou may have trouble qualifying for a low interest rate that makes debt consolidation worth it.

Your debt can return

Debt consolidation is a strategy to help you get out of debt. If you tend to overspend, your debt can come back. While debt consolidation can be a smart choice if you’re currently in debt and want to get out of it, it won’t address the root cause or any spending or saving issues you may have.

When Debt Consolidation Makes Sense

Debt consolidation might be worth it if:

  • You have strong credit and may qualify for a lower interest rate. If you have a good or excellent credit score and can get a lower rate than you’re currently paying, debt consolidation can save you money on interest and even help you pay off your debt faster.
  • You want to simplify the payment process. If you have multiple monthly payments with their own due dates and you decide to consolidate the debt, you only have one payment to worry about.
  • You are working hard to control your spending. If you used to overspend but are taking steps to manage your budget and live within or below your means, debt consolidation can help put you on the path to a debt-free lifestyle.

Of course, debt consolidation doesn’t make sense in some scenarios. If you have a small amount of debt that you can pay off quickly, it’s probably not worth it, especially if you have fees to pay.

If you don’t have the best credit or your credit score is lower than when you first took on your debt, you may have trouble getting approved for a low interest rate or a loan or balance transfer card that allows you to shop around. debt consolidation. .

How to get a debt consolidation loan

If you are interested in obtaining a debt consolidation loan, follow these steps:

  1. Check your credit score. Go to a website that offers free credit scores (such as You can also ask your lender, credit card issuer, or credit counselor for your credit score. This way, you’ll know where your credit stands and have an idea of ​​what type of interest rate you may qualify for.
  2. Make a list of your debts and payments. Create a list of all the debt you want to consolidate, including credit cards, payday loans, store cards, and any other high-interest debt. Add them up to find out how much debt you have and how big a debt consolidation loan you need.
  3. Shop around and compare options. Explore debt consolidation loans from various banks, credit unions, and online lenders. Compare the rates, terms and fees for each option so you can make the best decision for your particular situation.
  4. Ask for a loan. Once you’re ready to apply for a loan, apply online or in person. Be prepared to submit documents such as your government-issued ID, W-2s, pay stubs, and bank statements.
  5. Close the loan and make the payments. If the lender pays your creditors for you directly with your debt consolidation loan proceeds, check your bills to make sure they’re paid. If the lender does not make direct payments to creditors, you must pay each debt with the money you receive.

If you’re ready to apply for a debt consolidation loan, Credible lets you compare personal loan rates from multiple lenders, all in one place.

Does Debt Consolidation Affect Your Credit?

Debt consolidation can temporarily take a toll on your credit. When you apply for a personal loan or balance transfer card, the lender will do a thorough credit check, which can lower your credit score by a few points. Also, when you open a new credit account and lower the average age of your account, your credit score will likely drop as well.

The good news is that debt consolidation can also help your credit. Since you’ll lower your credit utilization ratio, or the amount of your available credit you’re using, you may be able to offset some of the negative effects of opening a new account. Plus, if you commit to making your payments in full and on time every month, you’ll improve your payment history and boost your credit score while you’re at it.

What credit score do you need to get a debt consolidation loan?

Credit qualification requirements for debt consolidation loans vary by lender. But in most cases, you’ll need a credit score of at least 650. If your score is lower, don’t worry. Some debt consolidation lenders may accept credit scores of 600 or even lower. Just keep in mind that a lower credit score will likely mean a higher interest rate, which could thwart your plan to consolidate debt.


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