Debt Consolidation Pros and Cons: Know the Risks

Debt consolidation rolls your unsecured debts into one bigger loan with a lower interest rate. But will it work for you? 

Before jumping in and applying for loans, it’s essential to consider debt consolidation’s potential benefits and drawbacks.

Pros and cons of consolidating your debts

Before jumping in and applying for loans, it’s essential to consider debt consolidation’s potential benefits and drawbacks.

Simplifies your financesThere will be a credit check and a high credit score is required
You pay off debt fasterYou could end up paying more in interest over the life of the loan
It may boost your credit scoreIt won’t solve your problems if you don’t correct your financial habits
Gives you a fixed repayment scheduleUpfront costs
Can get lower interest ratesYou might have to pay origination fees

READ MORE: Does debt consolidation close credit cards?

Pros of debt consolidation

Debt consolidation has a few key advantages over other debt relief programs:

1. Faster debt repayment

Depending on the total debt you have, borrowers may be able to get out of debt faster because you’re paying less interest. While credit cards don’t have a set repayment schedule – you just have to make the minimum payments each month – a debt consolidation loan will be on a fixed schedule, and you’ll have to pay a set amount each month.

READ MORE: 5 simple ways to consolidate your credit card debt

Pro tip: The faster you can repay your debts, the less you’ll pay in total interest over the life of your loans.

2. Simplified finances

If you’re struggling to track all your monthly bills and some get overlooked or skipped, it triggers late fees. With a debt consolidation loan, you can solve this problem because you only have to worry about one monthly payment, and flexible loan repayment terms give you some control over how much you’ll pay each month.

Pro tip: This can help you get on track with budgeting so you don’t consistently overspend.

3. Lower interest rates

Credit card interest rates have been steadily rising, with the average card charging about 15% to 20% APR. Th average debt consolidation loan interest rate is about 12%. Though rates vary based on loan amounts, term lengths and your credit score, you likely will be able to find a debt consolidation loan with a rate lower than what you’re currently paying.

Pro tip: Debt consolidation works best for people with good to excellent credit scores, because those scores will qualify you for the most competitive personal loan rates. However, some lenders don’t have a credit score requirement, and even though the interest rates on those loans will be higher, it could still mean significant savings over what you’re currently paying, particularly if you have payday loan or title loan debt.

READ MORE: Best debt consolidation loans for military vets

4. Fixed monthly payments

You’ll know exactly how much you owe each month, and when your last payment will be. Credit cards have variable interest rates, while debt consolidation loans will have a fixed interest rate that’s good for the life of the loan.

5. Build credit

Debt consolidation may initially knock down your credit score a bit due to the hard credit inquiry when you apply for the new loan, but that impact will be brief. 

Over time you’ll establish a pattern of on-time payments, and payment history accounts for 35% of your overall credit score. 

You will also have better credit utilization because of the additional credit you’ve gotten from the new loan. Credit utilization accounts for another 30% of your score.

For example, if you have $20,000 in credit card debt, and a total of $40,000 in available credit, your credit utilization will be 50%. But if you apply for and are approved for a $20,000 debt consolidation loan and pay off those revolving lines of credit, your credit utilization ratio will decrease and your credit score will go up – as long as you keep your credit card accounts open.

READ MORE: What happens to your credit when you get married?

Cons of debt consolidation

Debt consolidation also has a few downsides:

1. You may pay more to get out of debt

There can be several fees associated with debt consolidation. These include:

  • Annual fees
  • Balance transfer fees
  • Loan closing costs
  • Loan origination fees

In addition, because you’re repaying the loan over a longer period of time, you could end up paying more in interest over the life of the loan, despite the lower interest rate.

READ MORE: Debt consolidation for married couples

Pro tip: Seek out preapproval for a debt consolidation loan, and before you choose the loan you want, be sure to ask about fees, including late payment fees or fees for paying your loan off early.

2. You may only qualify for higher interest rates

If you have a bad credit score, you may end up paying more in interest or not qualify for a loan at all. In these instances, debt settlement could be a better option for you.

That’s because debt consolidation really only works if you can transfer your existing debts into a new loan with a lower interest rate and a longer loan term. If your credit history is poor, you may not qualify for any loan offers that make debt consolidation worth your time and effort. 

Pro tip: Before seeking a debt consolidation loan, review your credit reports and learn your credit scores. See if there are some strategies you can use to bump it up a bit.

3. It won’t fix underlying spending issues

Debt consolidation won’t be a help in the long run if you continue overspending. Many people don’t have the willpower when they see a slew of empty credit cards. In order to get total control of your finances, it’s important to address the issues that led to the debt in the first place. Pack your cards away, remove them from your digital wallet and make using them more difficult. Save one for true emergencies or to cover day-to-day expenses, but make sure that you pay that one off in full at the end of each month.

READ MORE: Debt consolidation and divorce

Pro tip: The best way to make debt consolidation work for you is to sit down and map out a monthly budget once your consolidation loan payment is set. If you simply don’t earn enough to cover your monthly expenses without taking on debt, it’s time to do a reality check and either cut your expenses or find a new job or side hustle to increase your income.

4. Missing payments could make your situation worse

This ties into the last point, but if you can’t make the monthly payments on your debt consolidation loan by the due date each month, you will not only rack up late fees but you could end up paying higher interest rates, which means it will cost you more each month and over the life of your loan.

READ MORE: Can payday loans be consolidated?

5. Debt settlement could end up costing less in the long run

When you enroll in a debt settlement program, you will pay a flat fee for each enrolled debt. The debt settlement company will negotiate with your creditors, and you will end up paying less than the total amount that you owe. The average debt settlement customer ends up paying about 80% of their total enrolled debt, even after accounting for fees. 

With debt consolidation, you’ll repay the full amount plus whatever interest accrues over the life of your loan. 

READ MORE: Debt consolidation vs. debt settlement

When is the best time to consolidate your debts?

There are several factors to consider:

  • If you have a large amount of debt and your credit score is high enough to qualify
  • If you make several minimum monthly payments on multiple debts each month
  • If you have a cash flow issue or are struggling to pay your bills each month

READ MORE: How to consolidate installment loan debt

When is debt consolidation a good idea?

For some, consolidating debts will be life-changing, but it won’t be practical for everyone. Here are some general guidelines to help determine if it’s a good idea for you.

Debt consolidation can be a good idea if:

  • You’re overwhelmed by multiple monthly bills and can’t pay them off
  • You’ve taken inventory of all your existing debt
  • You have less than $7,500 in unsecured debt
  • You need a lower monthly payment
  • Your total debt isn’t more than 40% of your gross income
  • Your credit score is high enough to secure a low-interest debt consolidation loan
  • You have done all your research and understand what you’re getting into

READ MORE: Debt consolidation loans for bad-credit borrowers

Pro tip: Use the money you save on multiple monthly payments to start an emergency fund. 

When is debt consolidation a bad idea?

  • Your credit rating is too low for you to secure a low-interest loan
  • You are consolidating unsecured debt with a secured loan
  • You are spending more than you earn or if you still haven’t solved your spending problems. 
  • Your debt load is too small; in that case, applying for debt consolidation often doesn’t make sense.

READ MORE: Debt consolidation when you’re between jobs

Pro tip: Before taking any action, you need to reassess your financial situation to ensure you can handle the new loan.

To learn more about debt consolidation, check out this video:

Types of debt that can be consolidated

  • Medical bills
  • Credit card debt
  • Student loans
  • Payday loans
  • Title loans

READ MORE: Best debt consolidation loans for health care workers

Pro tip: Secured debts can technically be consolidated, but it usually won’t make good financial sense. That’s because interest rates for secured loans (like car loans) typically have lower interest rates than most personal loans. 

Other debt relief methods

READ MORE: How to get your debt under control now

The bottom line

Debt consolidation can help you become debt-free, but it won’t work for everyone. Before starting the loan applications, you need to weigh the pros and cons to understand how the process works.

If you’re unclear or have questions, DebtHammer can help. Schedule a free consultation now and our team of experts will help you review your options to find the one that’s best for you.


What’s the difference between secured loans and unsecured ones?

Secured loans are backed by assets you currently own, like a house or car. This is also known as collateral. If you fail to repay a secured loan, you’re at risk of losing the asset that secured your loan. Unsecured loans are not backed by an asset. Your creditworthiness will determine whether you’re eligible for unsecured loans. The risks of these loans are higher for the lender because if you fail to repay, there is no asset to seize.

What should I do if I only qualify for new loans with higher interest rates?

Consolidating debts to a loan with a higher interest rate won’t make sense. If the interest rate is lower than some debts than others, consolidate the higher interest rate debt onto the new loan and consolidate only those. Then use a payoff strategy like debt snowball or avalanche to tackle the other debts. If the interest rate is higher than all of your other debts, consider debt settlement. It could help you prevent filing for bankruptcy.

How does new credit affect credit scores?

New credit will usually affect your credit score slightly. Your credit score will decrease for a few months because of the hard credit inquiry on your credit report. However, if you use the new credit for debt consolidation, your credit score will go up because of the changes to your credit utilization. For example, if you roll three maxed out credit cards into a new loan, suddenly your available credit number is significantly higher. This is a big component of your credit scores.

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