The Pros and Cons of Debt Consolidation

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

Quick glance: Pros and cons of debt consolidation

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.

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.

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.

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: How does debt affect your credit?

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.

» MORE: Balance transfer card vs. personal loan

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.

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, but membership is typically quick and affordable

• 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