Debt Consolidation Pros Cons: Is It Right for You?

Dive deep into the benefits and drawbacks of debt consolidation loans in our latest guide. Learn whether this strategy makes sense for your financial goals with our analysis of debt consolidation pros and cons.
couple reviewing debt and bills

Millions of Americans grapple with debt. From credit cards to medical bills, student loans, and personal loans, juggling various payments and high interest rates can be overwhelming. Many people in this situation turn to debt consolidation as a possible solution. You’ll learn more about debt consolidation pros and cons in this post. So, what is debt consolidation, and is it the right strategy for you?

Essentially, debt consolidation bundles multiple debts into one new loan with a fixed monthly payment. It can be a tempting solution as it simplifies debt management and potentially lowers your monthly payments. But before jumping into a debt consolidation loan, it’s critical to weigh the debt consolidation pros and cons carefully.

Table of Contents:

Debt Consolidation Pros

Consolidating your debts might offer benefits like easier budgeting, lower interest rates, a better credit score, and psychological relief. Let’s discuss why debt consolidation can help you.

Simplifies Payments and Improves Budgeting

Managing multiple debts with varying interest rates and payment due dates can feel like a logistical nightmare. It’s easy to lose track of what needs to be paid. But with debt consolidation, all your debts merge into one. This gives you one convenient monthly payment with a fixed amount.

Reduces Interest and Lowers Payments

Often, but not always, you can secure a lower interest rate on your new debt consolidation loan, especially if you have good credit. This lower interest rate can significantly reduce the overall cost of your debt. Consolidating higher-interest debts like credit cards into a loan with a lower interest rate may lead to reduced monthly payments.

Boosts Your Credit Score

As of July 2024, the average credit card interest rate sits at a significant 20.71 percent, compared to the lower average personal loan rate of 12.35 percent. Debt consolidation may positively affect your credit utilization ratio, potentially increasing your credit score in the long run. This is because a good credit score often translates to better loan terms.

Offers Psychological Relief

Dealing with debt is stressful. Taking proactive steps to get on top of things can help. Knowing that you have a set repayment schedule and just one monthly payment can bring significant peace of mind. This can free up mental energy to focus on other important aspects of your life.

Debt Consolidation Cons

Debt consolidation, although alluring, has downsides that could worsen your financial situation if you’re not careful. Let’s consider some reasons you may want to think twice before consolidating.

Risk of Accumulating More Debt

If you don’t adjust your spending habits, you could easily end up with even more debt than before you started consolidating. Because consolidating frees up credit, you’re likely to start overspending. To avoid falling back into a cycle of debt, create a realistic budget and stick to it.

Higher Interest Rates for Borrowers with Bad Credit

You usually need good credit to get a lower interest rate for a debt consolidation loan. While rates depend on various factors, including your loan amount and repayment term, borrowers with low credit scores (less than 670) might end up paying a higher interest rate than they had on their original loans or credit cards, making consolidation counterproductive. This ultimately can leave you worse off financially. Consider exploring options like secured debt consolidation loans which might offer more favorable rates for individuals with less than perfect credit.

Loan Fees Add Up

You could encounter several extra charges including:

These additional expenses might eat into the interest savings that come with consolidation. Depending on the loan provider, they may add thousands of dollars to your costs. Carefully factor these fees into your decision-making process to see if consolidating remains a financially sound option.

Credit Score Could Suffer

Though debt consolidation can improve your credit over time, applying for a consolidation loan will show on your credit report as a hard inquiry. A single hard credit inquiry typically won’t severely damage your credit. But several inquiries in a short span could considerably impact your score, potentially lowering it for a few months or longer. Also, be sure to make timely payments on your new debt consolidation loan because a missed or late payment can drastically lower your score and affect your future borrowing abilities.

Debt Consolidation Alternatives

What do you do if consolidating doesn’t align with your financial goals? Consider these viable alternatives to debt consolidation:

The Snowball Method:

List all your debts from smallest to largest and focus on making the minimum payment on each loan, except the smallest. All your extra money should go to eliminating the smallest debt first. You’ll gain momentum as you achieve quick wins, motivating you to continue until all your debt is gone.

The Avalanche Method

Organize your loans from highest interest to lowest and focus on repaying the highest-interest loan first. It usually makes more sense financially to repay high-interest debts first to reduce their cost in the long term. Continue with the process by applying any extra money towards the debt with the next-highest interest rate.

Balance Transfer Credit Cards

If your debt is primarily on high-interest credit cards, consider balance transfer cards offering a 0 percent promotional interest period, usually 12 to 24 months. You could save considerably on interest if you pay off your debt during the introductory period. But don’t let any introductory period lure you into a false sense of security. Because you risk being subject to a high APR once the promotion ends, prioritize settling the balance during the 0 percent APR window.

Debt Management Plan

Reach out to a non-profit credit counseling agency that can help you create a debt management plan (DMP). These plans consolidate your debt and negotiate lower interest rates and monthly payments with your creditors. There may be drawbacks including mandatory monthly fees and credit limitations, however, this is an option if you find managing debt independently challenging.

FAQs about Debt Consolidation Pros Cons

What is a disadvantage of debt consolidation?

Debt consolidation doesn’t address the root of your financial troubles. You could accumulate additional debt after consolidation if you haven’t addressed the cause of your spending habits. Another disadvantage is that consolidation loans might involve fees like annual fees or balance transfer fees that could eat into any interest savings you might experience.

What were the disadvantages of consolidation?

Borrowers with poor credit could face a higher interest rate than on their original loans, negating consolidation’s potential benefits. Extending the repayment terms can seem tempting as a way to secure lower monthly payments. But be aware you could end up paying significantly more interest over the extended term. Debt consolidation may also negatively affect your credit score due to the impact of a hard credit inquiry.

Do consolidation loans hurt your credit score?

Yes, initially. A lender initiates a hard credit inquiry when you apply for any type of credit including a debt consolidation loan, potentially dropping your score for a while. Your score will generally bounce back if you pay on time and stick with your budget.

Is it wise to consolidate credit card debt?

It could be a smart move to consolidate credit card debt if you can score a lower interest rate. Also, with just one payment instead of several, consolidation simplifies repayments. That said, ensure you make on-time payments and reduce your spending, otherwise, consolidation is unlikely to solve any problems long-term.


Choosing whether to use a debt consolidation loan can be a big decision, so it’s important to be fully informed. Though debt consolidation can help lower monthly payments, interest rates, and simplify bills, there is no guarantee you will actually get a lower rate. There are downsides too, like the chance of amassing even more debt and getting slapped with loan fees that might cancel out the benefits. If you’re disciplined and address your spending issues before looking at consolidation loans, weighing all the debt consolidation pros and cons can be the key to a debt-free future.



Reader Interactions

Leave a Comment