Are Debt Consolidation Loans a Good Idea? Pros and Cons

A debt consolidation loan can be a terrific tool for accelerating debt payments and getting your finances under control. When you get a debt consolidation loan, you typically take out a personal loan and receive the funds in a lump sum. You use that lump sum to pay off several debts at once, rolling all those balances into one loan you then repay.

This strategy can help you streamline your finances and avoid the challenges of juggling multiple payments, like missed payments that ding your credit score. Here’s more information about how debt consolidation loans work and the pros and cons of applying for one.

Table of Contents

1. Pros of debt consolidation loans
2. Cons of debt consolidation loans
3. Is debt consolidation a good idea for you?
4. Where to get a debt consolidation loan
5. Should you consider debt relief instead?
6. FAQ

Pros of debt consolidation loans

There are several benefits to using a debt consolidation loan.

✅ Streamline monthly payments

According to the Consumer Financial Protection Bureau, consumers incur over $14 billion in credit card late fees each year. The more bills you have to manage, the more likely you’ll accidentally miss a payment.

Streamlining your bills into a single monthly payment can go a long way toward helping you organize your finances and ensure you make payments on time.

✅ Lower interest rates

The most recent Federal Reserve data shows the average personal loan interest rate is 12.35%, whereas the average credit card interest rate is 21.47%. By consolidating credit card debt into a personal loan, consumers can save on interest costs over time.

✅ Fixed terms 

Debt consolidation loans come with a set repayment term, which can be up to 10 years or more. This term allows borrowers to make the same monthly payments and have a specific payoff date. Streamlining and organizing your finances with predictable monthly payments helps you better plan your financial future. 

✅ Improved credit score

A 2019 TransUnion study showed that 68% of consumers who used a debt consolidation loan saw a 20-plus point increase in their credit scores. If you use a debt consolidation loan to pay off high-interest credit card debt, your credit score will likely increase because you’ll improve your debt-to-credit ratio. This ratio, also known as “amounts owed,” makes up 30% of your score.

Cons of debt consolidation loans

However, it’s important to consider the following before getting a debt consolidation loan.

✖️ Higher long-term costs

When you consolidate your loans, you sign up for a new loan and new terms. This means you might repay your debt for a longer period, paying more interest overall. It’s wise to run the numbers to learn how much it would cost to pay off your debt quickly versus consolidating it into a new loan.

✖️ Origination fees

Some lenders charge origination fees, which can be up to 10% of your loan. When comparing lenders, it’s smart to find out whether they charge origination fees and how much they are. 

Sometimes, a lender might seem like a better deal because it offers a low interest rate, but then you realize it has high origination fees. So, when evaluating lenders, ask questions about their fees and costs so you can compare them equally.

---

Tip

The annual percentage rate (APR) on your loan considers the simple interest rate plus fees, such as origination fees. Comparing APRs can give you an apples-to-apples comparison of your loan offers.

---

✖️ Not guaranteed to change habits

Consolidating debt can help reduce monthly payments and streamline your finances, but it doesn’t always change the root cause of debt accumulation. It’s important to take the time to self-reflect and understand why you got into debt in the first place. That way, consolidating your debt can be the first step to your new, financially organized life.

✖️ Temporary score drop

Whenever you apply for a debt consolidation loan, a lender will make a hard inquiry on your credit. This causes a temporary score drop of a few points. However, the effects of this drop will wear off over time. If you can pay off high-interest debt with the loan, your score will likely go up once you free up more credit.

Is debt consolidation a good idea for you?

A debt consolidation loan might not be right for every situation. Here are several financial scenarios you might be experiencing and our opinion on whether you should consider a debt consolidation loan as a next step.

Financial scenario	Are debt consolidation loans a good idea?
Good credit with high-interest credit card debt	✅ Consider it
Current debt payments are manageable with low interest rates	❌ Reconsider it
Struggle with overspending and shopping	❌ Reconsider it
Want to lower interest rates on current debts	✅ Consider it
Unable to qualify for a consolidation loan with a lower interest rate than current debts	❌ Reconsider it
Willing to develop positive money habits and make a financial management plan	✅ Consider it
Struggling to manage multiple debt payments each month	✅ Consider it

If you’re still unsure whether a debt consolidation loan is right for you, ask yourself whether you would feel relieved by consolidating your debts. For some people, it’s worth applying to alleviate significant financial stress.

Others who want to pay off their debt quickly and don’t want to go through the process of applying for another loan might not need to consolidate.

Consider establishing your own repayment plan without consolidation. A common strategy is the debt snowball, where you repay the smaller loan first. This is intended to build confidence and efficacy. You then apply the amount you paid on the smaller loan to the next debt owed, and so on.

Another common strategy is to pay off the high-interest-rate loan first. I recommend engaging with a counselor, such as an Accredited Financial Counselor (AFC). They can offer low-cost help or volunteer at no cost.

Another option is to ask a trusted family member or close friend, but these are rare opportunities and can be tricky to navigate so as not to damage the relationship.

Erin Kinkade, CFP®

Where to get a debt consolidation loan

When considering a debt consolidation loan, it’s important to choose a lender that aligns with your financial needs and credit profile.

• Credible is an excellent starting point for shopping around, as it serves as a marketplace where you can compare multiple loan offers to find the best fit for your situation.
• If your credit score isn’t perfect, Upgrade could be a great option; it specializes in working with borrowers who have fair or bad credit.
• For those specifically looking to tackle high-interest credit card debt, Happy Money is our top recommendation. Each lender offers unique advantages, making them solid choices depending on your specific financial goals.

See how the lenders compare below, and read our best personal loans article to learn more.

Should you consider debt relief instead?

Debt relief might be worth considering if you’re falling behind on payments, unable to qualify for a debt consolidation loan or one large enough to cover your debts, or feeling completely overwhelmed by your financial obligations.

Debt relief programs typically involve negotiating with your creditors to reduce the amount you owe or restructuring your payments into more manageable terms. While it can significantly ease financial stress, debt relief does come with risks, such as a potential impact on your credit score.

If you’re unsure whether debt consolidation or debt relief is the better choice for you, check out our detailed comparison of debt relief vs. debt consolidation to learn more.

For those considering debt relief, here are our top recommendations. These companies are well-regarded for their expertise and commitment to helping individuals regain financial stability. Read our best debt relief companies article for more information.

Read More

Is Debt Relief a Good Idea?

FAQ

Do debt consolidation loans hurt your credit?

Debt consolidation loans may affect your credit. You may see an initial slight dip in your score as a result of the hard inquiry from the lender to assess your creditworthiness. Closing old accounts once your debts are consolidated might also lower your score. However, these are often short-term declines and should recover with disciplined repayment.

Is it hard to get a debt consolidation loan?

It often depends on your financial circumstances. High credit scores and low debt-to-income ratios tend to encourage lenders to approve your application. If your credit score is mediocre or you carry high debt relative to your income, it might be more challenging.

How long does it take your credit to recover from debt consolidation?

Recovering your credit score after taking out a debt consolidation loan is no overnight task. It might take anywhere from a few months to a year or more, depending on your individual circumstances. Factors including your repayment history, credit utilization rate, and the length of your credit history all contribute to the recovery time.

How much debt is too much to consolidate?

The threshold varies based on the lender and the borrower’s financial health. Some lenders might enable you to consolidate up to $50,000, and others may allow as much as $100,000. As the borrower, you must be confident in your ability to make the necessary repayments within the loan’s terms.