Pros and cons of debt consolidation


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

If you have high-interest credit card debt, are struggling to make payments on a loan, or are struggling to keep track of multiple due dates, a debt consolidation loan could be a good option — especially if your credit score has improved since you started paying off your loans .

While consolidating high-interest debt with a personal loan or wire transfer credit card can make sense in certain situations, it’s not for everyone. Let’s dive deeper into how debt consolidation works and some pros and cons 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, a credit card with balance transfer, a home equity loan, or a home equity line of credit (HELOC). Here are some common types of debt consolidation.

Debt consolidation with a personal loan

When you seek debt consolidation with a personal loan, you can lower your interest rate, improve your loan terms, and streamline your monthly payments. You can find Debt Consolidation Loan 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 you may find yourself out of debt faster.

You can Compare personal loan rates from various lenders using Credible and it will not affect your credit score.

Debt Consolidation with a Credit Card for Balance Transfer

If you Consolidate credit card debt With a credit transfer credit card, you sign up for a new credit card, ideally with a low interest rate or 0% APR as an introductory offer for a certain period of time. Then you transfer your existing card balance 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 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 what your home is currently worth).

If you’re approved for a home equity loan, you’ll receive a lump sum upfront and can then use the money to pay down your existing debt. Then you begin paying the home loan for the amount borrowed plus interest. HELOCs are also a type of second mortgage, but they are a line of credit that you can draw up to your credit limit if you need to.

If you use one of these options to consolidate your debt, you may be able to earn a lower interest rate than you can with a debt consolidation loan because your home serves as collateral for the loan.

Benefits of Debt Consolidation

Some Some of the most notable benefits of debt consolidation include:

You can secure a lower price

The biggest benefit of debt consolidation is that you can potentially lock in a lower interest rate and save a lot of money in interest. Depending on the strategy you choose and the amount of debt you have, this could add up to hundreds or even thousands of dollars. You can use this extra money to pay down your debt faster, increase your emergency fund, or meet other short- or long-term financial goals.

You have a single monthly payment

Keeping track of multiple monthly payment dates isn’t easy. Debt consolidation allows you to combine your debt into one new monthly payment with a fixed interest rate that stays the same over 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 getting out of debt sooner and make the process less overwhelming.

You’ll be debt free faster

When you consolidate debt at a lower interest rate, you can use the money you save on interest to get out of debt faster. You can add the money you save in interest to your remaining balance and shorten your payback period, allowing you to save even more. To really speed up your debt-clearing mission, try getting a balance transfer card with an introductory offer of 0% APR.

Disadvantages of Debt Consolidation

Before proceeding with debt consolidation, consider these disadvantages:

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. For example, if you take out a personal loan, you will likely have to pay a processing fee or application fee to process the loan. Consolidation with a balance transfer card There is typically a fee for transferring the balance of 3% to 5% of the amount you transfer, while debt consolidation with a home equity loan may involve closing costs.

You are not guaranteed a lower interest rate

In a perfect world, you could secure a lower interest rate on a personal loan, transfer card, or home loan so you could really save on debt consolidation. But the reality is that the lowest interest 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 worthwhile.

Your debt can return

Debt consolidation is a strategy to help you get out of debt. If you tend to overspend, your debt can return. While debt consolidation can be a wise choice if you are currently in debt and want to get out of it, it will not solve the root of the problem or your spending or savings problems.

When debt restructuring makes sense

Debt consolidation may be worthwhile if:

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

Of course, in some scenarios, debt consolidation makes no sense. If you have a small amount of debt that you can pay off quickly, it probably isn’t 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 started borrowing, you may have trouble getting a low interest rate or a balance transfer loan or card that you can actually use to do a debt consolidation loan.

How to get a debt consolidation loan

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

  1. Check your credit score. Go to a website that offers free credit reports (e.g. You can also ask your lender, credit card issuer, or credit advisor about your credit score. That way you know where your credit stands and have an idea of ​​what type of interest rate you may qualify for.
  2. List your debts and payments. Make a list of all the debt you want to consolidate, including credit cards, payday loans, store cards, and other high-interest debt. Add them up so you know how much debt you have and how much debt consolidation loan you need.
  3. Take a look around and compare the options. Explore debt consolidation loans from various banks, credit unions, and online lenders. Compare the rates, terms, and fees of each option so you can make the best decision for your unique situation.
  4. Apply for a loan. Once you are ready to apply for a loan, complete the application online or in person. Be prepared to submit documents such as your government issued ID, W-2s, payslips, and bank statements.
  5. Complete the loan and make payments. If the lender pays your creditors directly for you with your debt consolidation loan funds, check your accounts to make sure they are paid. If the lender does not make direct payments to the creditors, you will have to repay any debt with the money received.

When you’re ready to apply for a debt consolidation loan, Credible can help you easily Compare personal loan rates from different lenders, all in one place.

Is Debt Consolidation Affecting Your Credit?

Debt consolidation can be temporary charge your credit. When you apply for a personal loan or a balance transfer card, the lender performs a hard credit request that can drop your credit score by a few points. If you open a new credit account and lower your average account age, your credit score will likely decrease as well.

The good news is that debt consolidation can help your credit score, too. Since this lowers your credit utilization rate, or the amount of available credit you use, you may be able to counteract some of the negative effects of opening a new account. Plus, when you commit to making payments on time every month, you’ll improve your payment history and improve your credit score while you’re at it.

What Credit Do You Need to Get a Debt Consolidation Loan?

Credit score requirements for debt consolidation loans vary by lender. However, in most cases you will need a credit score of at least 650. If your score is lower, don’t worry. Some debt consolidation lenders will accept credit scores of 600 or even lower. Just remember that a lower credit rating likely means a higher interest rate, which could ruin your debt consolidation plan.


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