The Pros and Cons of Debt Consolidation - NerdWallet (2024)

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If you have multiple sources of debt, like high-interest credit cards, medical bills or personal loans, debt consolidation can combine them into one fixed monthly payment.

Getting a debt consolidation loan or using a balance transfer credit card can make sense if it lowers your annual percentage rate. But refinancing debt has pros and cons and may not be right for everyone.

» MORE: Best debt consolidation loans

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Quick glance: Pros and cons of debt consolidation

Pros of debt consolidation

Cons of debt consolidation

  • You could receive a lower rate.

  • You could get out of debt faster.

  • You’ll have just one monthly payment.

  • You could build your credit.

  • You may not qualify for a low rate.

  • There may be additional fees.

  • Missed payments could make things worse.

  • It doesn't address root issues with debt.

Pros of debt consolidation

You could receive a lower rate

The biggest advantage of debt consolidation is paying off your debt at a lower interest rate, which saves money.

For example, if you have $9,000 in total debt with a combined APR of 25% and a combined monthly payment of $500, you’ll pay $2,500 in interest over about two years.

But if you were to take out a debt consolidation loan with a 17% APR and a two-year repayment term, the new monthly payment would be $445, and you would save $820 in interest.

If you qualify for a balance transfer card, you could pay zero interest during the promotional period, which can last up to 21 months. You'll likely also pay a 3% to 5% balance transfer fee.

Use our debt consolidation calculator to see how much you could save by consolidating your debt at a lower interest rate.

You could get out of debt faster

By consolidating at a lower rate, you could also use the money you saved on interest to get out of debt even faster.

Revisiting the example above, your monthly payment would change from $500 to $445. If you don’t need that $55 elsewhere, and you want to get out of debt as soon as possible, you could keep making monthly payments of $500.

By applying your savings to your remaining balance, you’ll ultimately shorten the loan’s repayment term, which could save even more money on interest, since you’ll make fewer monthly payments overall.

This strategy has an even bigger payoff with a balance transfer card. Since you won’t be paying any interest during the promotional period, the savings you apply to your balance could be substantial.

» MORE: Balance transfer card vs. personal loan

You’ll have just one monthly payment

Instead of keeping track of multiple monthly payments and interest rates, consolidating lets you combine the debt into one payment with a fixed interest rate that won’t change over the life of the loan (or during the promotional period, in the case of a balance transfer card).

But it’s not just about simplifying your repayments. Consolidating can give you a clear and motivating finish line to being debt-free, especially if you don’t have a debt payoff plan in place.

The Pros and Cons of Debt Consolidation - NerdWallet (7)

You could build your credit

Applying for a new form of credit requires a hard credit inquiry, which can temporarily lower your score by a few points.

However, if you make your monthly payments on time and in full, the net effect should be positive, especially if you’re consolidating credit card debt.

Paying off credit card balances lowers your credit utilization ratio, which is one of the biggest factors that determines your score, according to FICO.

» MORE: Best credit card consolidation loans

Cons of debt consolidation

You may not qualify for a low rate

Balance transfer cards can be hard to qualify for and typically require good to excellent credit (690 credit score or higher).

Debt consolidation loans are more accessible, and there are loans tailored for bad-credit applicants (629 credit score or lower). But borrowers with the highest scores usually receive the lowest rates.

» COMPARE: Best debt consolidation loans for bad credit

Unless the lender can offer you a lower rate than your current debts, debt consolidation usually isn't a good idea. In this case, consider another debt payoff strategy, like the debt avalanche or debt snowball methods.

There may be additional fees

Consolidating debt can come at a cost. Debt consolidation loans can include origination fees, which are typically 1% to 10% of the total loan amount and are typically included in the loan’s annual percentage rate. Balance transfer cards often come with balance transfer fees, usually 3% to 5% of the amount you’re transferring to the new card.

If these fees are higher than the amount you’d save by consolidating your debt, consider other debt payoff strategies.

Missed payments could make things worse

If you miss payments toward the new debt, you could end up in a worse position than when you started.

For example, if you fail to pay off your balance transfer card within the zero-interest promotional period, you’ll be stuck paying it at a higher APR — potentially higher than the original debt.

If you fall behind on a consolidation loan, you could rack up late fees, and the missed payments would be reported to the credit bureaus, jeopardizing your credit scores.

Before consolidating, make sure the new monthly payment fits comfortably in your budget for the entirety of the repayment period.

It doesn’t address root issues with debt

Though consolidation is a helpful tool, it isn't a sure fix for recurring debt and doesn't address the issues that led to debt in the first place.

If you struggle with overspending, consolidation could be a risky choice. By taking out a loan to pay off credit cards, for example, those cards will have a zero balance again. You might be tempted to use them before the new debt is paid off, digging you into an even deeper hole.

If you’ve been using credit cards to cover regular necessities like food and shelter, look for better alternatives to borrowing, like local charities that offer assistance with things like groceries, rent, utilities and transportation. A credit counselor at a reputable nonprofit can help you set up a budget and debt management plan rather than trying to tackle your debt on your own.

» MORE: Financial therapists say to disrupt debt cycle, look at your money beliefs

How to get a debt consolidation loan

Getting a debt consolidation loan includes shopping around for the best loan, which is usually the one with the lowest interest rate. Some lenders will let you pre-qualify to see potential rates without affecting your credit score.

Here are three places to look for a debt consolidation loan:

  • Credit unions: Credit unions tend to offer lower interest rates on debt consolidation loans for fair- or bad-credit borrowers than other types of lenders. You'll need to become a member of the credit union before applying.

  • Banks: Banks also offer loans for debt consolidation, but existing customers and borrowers with good or excellent credit are more likely to be approved.

  • Online lenders: Online lenders offer debt consolidation loans to borrowers in all credit brackets. You’ll still want to make sure the APR is lower than the combined interest rate of your current debts.

Once you’ve found the right loan and are ready to apply, gather your personal information like proof of identity, Social Security number and proof of income, which you’ll submit as part of your application. Most applications are online and take only a few minutes to fill out.

Depending on the lender you choose, loans can be funded the same day you’re approved or within one week.

» MORE: How to get a debt consolidation loan

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I'm a knowledgeable expert in the field of personal finance and debt management, with a deep understanding of various financial products and strategies. My expertise is demonstrated through a comprehensive understanding of the concepts and principles related to debt consolidation, personal loans, and credit management. I have a thorough understanding of the factors that influence the effectiveness of debt consolidation, such as interest rates, loan amounts, and credit scores. Additionally, I am well-versed in the process of obtaining debt consolidation loans and the various options available from different lenders.

Debt Consolidation and Personal Loans

Debt consolidation is a financial strategy that involves combining multiple sources of debt, such as high-interest credit cards, medical bills, or personal loans, into one fixed monthly payment. This can be achieved through a debt consolidation loan or by using a balance transfer credit card to lower the annual percentage rate (APR).

Pros of Debt Consolidation:

  1. Lower Interest Rate: Debt consolidation allows individuals to pay off their debt at a lower interest rate, resulting in significant cost savings.
  2. Faster Debt Repayment: By consolidating at a lower rate, individuals can use the money saved on interest to pay off their debt more quickly.
  3. Simplified Repayments: Debt consolidation simplifies repayments by combining multiple debts into one payment with a fixed interest rate.
  4. Credit Building: Making timely payments on a consolidated debt can have a positive impact on credit scores, especially when consolidating credit card debt.

Cons of Debt Consolidation:

  1. Qualification for Low Rates: Qualifying for a low rate, especially with balance transfer cards, may require good to excellent credit.
  2. Additional Fees: Debt consolidation may involve origination fees for loans or balance transfer fees for credit cards, which should be considered in comparison to potential savings.
  3. Risk of Missed Payments: Missed payments on the new debt could lead to a worse financial position, including higher APRs and negative impacts on credit scores.
  4. Addressing Root Issues: Debt consolidation does not address the underlying issues that led to the accumulation of debt, such as overspending or financial mismanagement.

Obtaining a Debt Consolidation Loan

When seeking a debt consolidation loan, it's essential to shop around for the best loan with the lowest interest rate. Potential sources for debt consolidation loans include credit unions, banks, and online lenders. Each option has its own criteria for approval and may cater to different credit brackets.

In conclusion, my expertise in personal finance and debt management allows me to provide comprehensive insights into the concepts and strategies related to debt consolidation, personal loans, and credit management. If you have any specific questions or need further guidance on these topics, feel free to ask!

The Pros and Cons of Debt Consolidation - NerdWallet (2024)


The Pros and Cons of Debt Consolidation - NerdWallet? ›

Pros and cons of debt consolidation loans

What is the catch with debt consolidation for the consumer? ›

You may pay a higher rate

Your debt consolidation loan could come with more interest than you currently pay on your debts. This can happen for several reasons, including your current credit score. If it's on the lower end, lenders see you as a higher risk for default.

Is debt consolidation good or bad for your credit? ›

Consolidating your debt can lower your monthly payments, but it can also cause a temporary dip in your credit score.

Is debt consolidation a good way to get out of debt? ›

If you're overwhelmed by multiple debts, debt consolidation might be a good option. This is particularly true if you can land a lower interest rate than the average rate you pay on your current debts.

Do you lose your credit cards after debt consolidation? ›

Debt consolidation doesn't automatically close your credit card accounts. But if keeping an account open tempts you to rack up more charges, then it might be a good idea to close the account.

What is a disadvantage of debt consolidation? ›

Debt consolidation might lower your monthly payments, make managing your monthly payments easier, decrease your interest rates and save you money overall. But there are also potential drawbacks, such as upfront fees and the risk of winding up deeper in debt.

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

Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.

What is the best debt consolidation company? ›

Best debt consolidation loans
  • SoFi: Best for fast funding.
  • Upgrade: Best for poor or thin credit.
  • Achieve: Best for quick approval decisions.
  • LendingClub: Best for co-borrowers.
  • Discover: Best for excellent credit.
  • Happy Money: Best for credit card consolidation.
  • LightStream: Best for large loans.

What is the minimum credit score for debt consolidation loan? ›

Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.

What is the best debt relief company? ›

National Debt Relief is the best overall debt settlement company, according to our research. National Debt Relief's low-cost fee structure and referral service make it a top option for people struggling with debts. Our highest-rated debt settlement companies all charge similar fees, ranging from 15% to 25% of the debt.

How much debt is too much to consolidate? ›

It generally takes a DTI of 36% or less to get the best interest rates and other terms. Many lenders won't loan to borrowers whose DTIs are over 43% at all. Even if approved, a high-DTI borrower may have to pay more interest on a debt consolidation loan than for the loans being consolidated.

Why is it so hard to get a debt consolidation loan? ›

Credit Score

Debt consolidation loans for bad credit are hard to come by. Lenders like to see a credit score of at least 670 for a debt consolidation loan, but probably closer to 700 just to be safe.

Can a debt consolidation loan be paid off early? ›

Bottom line. Debt consolidation can be a handy strategy for paying off multiple debts as quickly (and as affordably) as possible. This can be especially true if the personal loan you use to consolidate your debts doesn't charge you a penalty for paying back the balance early.

Can I buy a house after debt consolidation? ›

Debt settlement could saddle you with more financial problems, like lower credit scores and a bill from the IRS, both of which could make it harder to qualify for a mortgage. Ultimately you can still get a mortgage after debt settlement, but you have to approach the process with some strategy and caution.

Is it smart to get a personal loan to consolidate debt? ›

Debt consolidation is ideal when you are able to receive an interest rate that's lower than the rates you're paying for your current debts. Many lenders allow you to check what rate you'd be approved for without hurting your credit score so you can make sure you're okay with the terms before signing on the dotted line.

What is so great about consolidation for consumers? ›

The benefits of debt consolidation include a potentially lower interest rate and lower monthly payments. You can consolidate your debts using a personal loan, home equity loan, or balance-transfer credit card.

Are there any legitimate debt consolidation companies? ›

The best debt consolidation company overall is LightStream because it offers debt consolidation loans of up to $100,000 with an APR range of 5.95% to 20.24%. LightStream does not charge an origination fee, and it offers the possibility of getting the loan funded the same day you apply.

What are the pros and cons of debt settlement? ›

Debt settlement pros and cons
Might be able to settle for less than what you oweCreditors might not be willing to negotiate
Pay off debt soonerCould come with fees
Stop calls from collection agenciesCould hurt your credit
Could help you avoid bankruptcyDebt written off might be taxable

What happens when you go into debt consolidation? ›

Banks, credit unions, and installment loan lenders may offer debt consolidation loans. These loans convert many of your debts into one loan payment, simplifying how many payments you have to make. These offers also might be for lower interest rates than what you're currently paying.

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