Skip to contentNerdWallet Home Page
Sign InJoin

The Pros and Cons of Debt Consolidation

Debt consolidation may be a good idea if you can qualify for a low interest rate, make payments on time and stay out of debt in the future.

Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

Updated · 4 min read
Jackie Veling
Written by 
Lead Writer & Content Strategist
Kim Lowe
Edited by 
Head of Content, Personal & Student Loans
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

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

Personal loans from our partners

SoFi
Check Rate

on SoFi

SoFi

5.0

NerdWallet rating
APR

8.99-35.49%

Loan Amount

$5K- $100K

Lightstream
Check Rate

on LightStream

LightStream

4.5

NerdWallet rating
APR

6.49-25.29%

Loan Amount

$5K- $100K

BestEgg
Check Rate

on Best Egg

Best Egg

4.5

NerdWallet rating
APR

6.99-35.99%

Loan Amount

$2K- $50K

MORE DEBT CONSOLIDATION LOANS

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.
Video thumbnail

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
Article sources
NerdWallet writers are subject matter authorities who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, academic research and interviews with industry experts. All content is fact-checked for accuracy, timeliness and relevance. You can learn more about NerdWallet's high standards for journalism by reading our editorial guidelines.
Back to top

Methodology

NerdWallet verified icon

How we chose the best personal loans

Our team of consumer lending experts follow an objective and robust methodology to rate lenders and pick the best.

35+

Lenders reviewed

We review over 35 lenders, including major banks, top credit unions, leading digital platforms, and high interest installment lenders operating across multiple states.

25+

Categories assessed

Each lender is evaluated across five weighted categories and 27 subcategories, covering affordability, eligibility, consumer experience, flexibility, and application process.

70+

Data points analyzed

Our team tracks and reassesses hundreds of data points annually, including APR ranges, fees, credit requirements, and borrower tools, ensuring up to date, accurate comparisons.

Star rating categories

We evaluate more categories than competitors and carefully weigh how each factor impacts your experience.

Affordability 25%

We review lenders’ annual percentage rate offerings at least twice per year and the competitiveness of each lenders’ APR range. We also assess whether a lender charges an origination fee and any opportunity for borrowers to receive a rate discount.

Customer experience 20%

We consider the experience of the consumer trying to manage a personal loan, which means accessibility of customer service representatives, whether borrowers can choose and change their payment due date, and the ability to track their loan on a mobile app.

Underwriting and eligibility 20%

We consider the rigorousness of each lender’s underwriting practices and how widely available their loans are. This category includes whether a lender does a hard credit check before providing a loan, the range of credit profiles they accept and how many states their loans are offered in.

Loan flexibility 20%

We assess how flexible lenders can be with borrowers, including whether they offer multiple loan types, personal loan amounts and repayment term options and whether they offer direct payment to creditors on debt consolidation loans.

Application process 15%

We consider the lender’s full application process, including a borrower’s ability to preview their loan offer via pre-qualification, whether basic loan information such as APR range and repayment terms are available and easy to find online and how quickly a loan can be funded after approval.

5.0
Overall score

NerdWallet’s review process evaluates and rates personal loan products from more than 35 financial technology companies and financial institutions. We collect over 70 data points and cross-check company websites, earnings reports and other public documents to confirm product details. We may also go through a lender’s pre-qualification flow and follow up with company representatives. NerdWallet writers and editors conduct a full fact check and update annually, but also make updates throughout the year as necessary.

Our star ratings award points to lenders that offer consumer-friendly features, including: soft credit checks to pre-qualify, competitive interest rates and no fees, transparency of rates and terms, flexible payment options, fast funding times, accessible customer service, reporting of payments to credit bureaus and financial education. Our ratings award fewer points to lenders with practices that may make a loan difficult to repay on time, such as charging high annual percentage rates (above 36%), underwriting that does not adequately assess consumers’ ability to repay and lack of credit-building help. We also consider regulatory actions filed by agencies like the Consumer Financial Protection Bureau. We weigh these factors based on our assessment of which are the most important to consumers and how meaningfully they impact consumers’ experiences.

NerdWallet does not receive compensation for our star ratings. Read more about our ratings methodologies for personal loans and our editorial guidelines.
Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score Just answer a few questions to get personalized rate estimates from multiple lenders.
on NerdWallet

More like this

Personal LoansLoans
Best Debt Consolidation Loans

Jackie Veling's profile picture
By Jackie Veling
How to Get a Debt Consolidation Loan in 5 Steps

Getting a debt consolidation loan includes knowing how much you want to borrow, pre-qualifying with lenders and submitting your application.

Jackie Veling's profile picture
By Jackie Veling
Best Debt Consolidation Loans for Bad Credit

Jackie Veling's profile picture
By Jackie Veling
Does Debt Consolidation Hurt Your Credit?

Debt consolidation has the potential to help and hurt your credit score, but the overall effect should be positive if you're able to pay off your debt.

Bev O'Shea's profile picture
2
By Bev O'Shea, Jackie Veling