Pros and cons of debt consolidation

Debt consolidation can be a great way to pay off your high-interest debt, but this strategy also has drawbacks to consider

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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 payments on a loan, 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 can 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 pursue debt consolidation with a personal loan, you may reduce 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 debts and may become debt free faster. 

You can compare personal loan rates from various 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 0% APR introductory offer for a certain period of time. Then, you transfer your existing card balances to the new card and make one payment each month. 

Debt consolidation with a home equity loan or HELOC

Consolidating debt with a home equity loan or 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 what your home is currently worth). 

If you’re approved for a home equity loan, you’ll receive a lump sum of money upfront and can then use the cash to pay off your existing debts. Then you’ll start making payments on the home equity loan on the amount you borrowed, plus interest. HELOCs are also a type of second mortgage, but they’re 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 land a lower interest rate than you would with a debt consolidation loan because your home will serve as collateral to secure the loan. 

Pros of debt consolidation

Some of the most noteworthy advantages of debt consolidation include:

You may secure a lower rate

The greatest perk of debt consolidation is that you might lock in a lower interest rate and save a great deal of money in interest. Depending on the strategy you choose and amount of debt you have, this could equate to hundreds or even thousands of dollars. You can use this extra cash to pay off your debt faster, increase your emergency fund, or meet any other short- or long-term financial goals. 

You’ll have a single monthly payment

It’s not easy to keep track of multiple monthly payment due dates. Debt consolidation lets you combine your debts into one new monthly payment with a fixed interest rate that’ll remain 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 becoming debt free 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 put the money you save on interest toward your remaining balance and shorten your repayment term, which can help you save even more. To really expedite your mission to pay off debt, try to get a balance transfer card with an introductory 0% APR offer. 

Cons of debt consolidation

Before you move forward with debt consolidation, consider these drawbacks:

You might 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’ll likely have to pay an origination fee or application fee for processing the loan. Consolidation with a balance transfer card typically comes with a balance transfer fee of 3% to 5% of the amount you’re transferring, while consolidating debt with a home equity loan might include closing costs.

You’re not guaranteed a lower interest rate

In a perfect world, you’d be able to lock in a lower interest rate on a personal loan, balance transfer card, or home equity loan so you could really 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 credit, you may have trouble qualifying for a low interest rate that makes debt consolidation worthwhile. 

Your debt may return

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

When debt consolidation makes sense

Debt consolidation might be worthwhile if:

  • You have strong credit and might 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 decide to consolidate debt, you’ll only have one payment to worry about.
  • You’re 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 may help steer you toward 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 repay quickly, it’s probably not worth it, especially if you have to pay fees. 

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

How to get a debt consolidation loan

If you’re interested in taking out 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 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. Create a list of all the debts you want to consolidate, including credit cards, payday loans, store cards, and any other high-interest debts. Add them up so you know how much debt you have and how large of 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 of each option so you can make the best decision for your unique situation.
  4. Apply for a loan. Once you’re ready to apply for a loan, fill out the application online or in person. Be prepared to submit documents like your government-issued ID, W-2s, pay stubs, and bank statements.
  5. Close the loan and make payments. If the lender pays your creditors for you directly with your debt consolidation loan funds, check your accounts to make sure they’re paid off. If the lender doesn’t make direct payments to creditors, you’ll need to repay each debt with the money you receive.

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

Does debt consolidation affect your credit?

Consolidating debt can temporarily take a toll on your credit. When you apply for a personal loan or balance transfer card, the lender will perform a hard credit inquiry, which may lower your credit score by a few points. Also, when you open a new credit account and lower your average account age, your credit score will likely go down as well. 

The good news is debt consolidation can also help your credit. Since it will lower your credit utilization ratio, or how much of your available credit you’re using, you might be able to counter some of the negative effects of opening a new account. In addition, if you commit to making on-time payments in full 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 score 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 might defeat your plan for consolidating debt.