The Pros and Cons of Debt Consolidation

If you have multiple streams 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 — even at a lower rate.

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 and could eliminate the debt faster.

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. The money you save on the lower monthly payment could also go toward paying off the loan earlier.

If you qualify for a balance transfer card, you would pay zero interest during the promotional period, which can last up to 18 months. You will likely also pay a 3% to 5% balance transfer fee.

» MORE: Debt consolidation loans vs balance transfer cards

Use a debt consolidation calculator to see your total balance, total monthly payment and combined interest rate across debts.

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 overall 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.

» 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 or higher on the FICO scale).

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

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.

Borrowers looking to consolidate with a loan can prequalify with some lenders to see potential rates without affecting their credit scores.

You could fall behind on payments

Missing payments toward the new debt means that 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.

You haven’t addressed the root problem

Though consolidation is a helpful tool, it isn't a sure fix for recurring debt and doesn't address the behaviors 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.