Key takeaways
- Debt consolidation can simplify your finances and potentially lower your interest rate.
- There may be upfront costs that can offset potential savings.
- People with good credit may qualify for better loan terms, making consolidation a good option.
Debt consolidation involves combining several debts — such as credit cards, personal loans or medical bills — into a single loan with one monthly payment. This can simplify your finances and potentially lower your interest rate, depending on the loan terms and your credit profile.
Pros and cons of debt consolidation
You can consolidate nearly every type of consumer debt. However, debt consolidation loans aren’t a complete fix. You must still pay them off.
That said, consider these pros and cons to see if consolidation is right for your finances.
Pros
- Lower interest rates: Consolidation loans may offer lower interest rates than credit cards.
- Faster debt repayment: With a fixed repayment plan, you may be able to pay down debt faster.
- Simplified finances: One monthly payment instead of several.
- Fixed repayment schedule: Consistent monthly payments make it easier to budget.
- Credit boost: Timely payments on a consolidation loan and not using revolving credit can improve your credit score.
Cons
- Upfront costs: Fees like loan origination, balance transfer and closing costs can add up.
- Potentially higher interest rates: Borrowers with lower credit scores may not qualify for a better rate.
- Risk of missing payments: Missed payments can lead to late fees and credit score damage.
Benefits of debt consolidation
Debt consolidation is often the best way to organize your current debt and simplify repayment. Consolidation, if used correctly, offers benefits that could save you money.
Faster debt repayment
Taking out a debt consolidation loan can help put you on a faster track to total payoff and may help you save money on interest by paying down the balance faster. This is especially true if you have significant credit card debt you carry from month to month.
Keep in mind:
Consolidating offers a streamlined approach to credit repayment. Credit cards don’t come with a set repayment term and loans do.
Lower interest rates
As of May 2025, the average credit card rate is 20.12 percent. Meanwhile, the average personal loan rate is 12.26 percent.
Of course, rates vary depending on your credit score, and the loan amount and term length. But if you have average credit or better, you’ll likely get a lower interest rate with a debt consolidation loan than what you’re currently paying on your credit card.
Those with excellent credit often get the lender’s lowest rates. These are significantly lower than the average credit card rate.
Simplified finances
Instead of juggling multiple monthly payments, you’ll only need to remember one payment date each month. This can reduce stress and prevent missed payments.
Fixed repayment schedule
With a fixed repayment schedule, your payment and interest rate remain the same for the length of the loan, and there’s no unexpected fluctuation in your monthly debt payment. Since most personal loan rates are fixed, you’ll know exactly how much is due each month and when your last payment will be.
On the other hand, if you pay only the minimum with a high-interest credit card, it could be years before you pay it in full.
Credit boost
Paying off multiple debts with a single consolidation loan can positively impact your credit score, especially if you make timely payments. If you use the loan to pay off revolving debt and keep it paid off, your credit utilization ratio will also improve, which can boost your credit scores.
Drawbacks of debt consolidation
While debt consolidation can be helpful, it’s not without its risks. You’ll need to keep on top of your finances and prevent yourself from winding up in the same spot again later.
It won’t solve financial problems on its own
Consolidating debt doesn’t guarantee you won’t go into debt again and won’t eliminate your current debt or underlying financial habits. If you have a history of living beyond your means, you might do so again once you feel free of debt. To help avoid this, track your spending and make yourself a realistic budget that you are confident you can stick to. Evaluate where you’re spending every month and adjust accordingly to keep yourself on track.
You should also start building an emergency fund that can be used to pay for financial surprises. With an emergency fund, you don’t have to rely on credit cards.
There may be upfront costs
Some debt consolidation loans come with fees. These may include:
Before taking out a debt consolidation loan, ask about any fees, including ones for making late payments or paying your loan off early. Depending on your lender, these fees could be hundreds if not thousands of dollars. While paying these fees may still be worth it, you’ll want to include them in deciding if debt consolidation makes sense for you.
You may pay a higher rate
Bankrate’s take:
Consolidating your debt likely isn’t the best move for your finances if you have a low credit score and can’t secure a lower interest rate on your new loan.
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 of default. You’ll likely pay more for credit and be able to borrow less.
Beware of extending your loan term, too. Extending your loan term could lower your monthly payment, but you may pay more interest in the long run.
As you consider debt consolidation, weigh your immediate needs with your long-term goals to find the best solution or consider debt consolidation alternatives.
Missing payments will set you back even further
If you miss one of your monthly loan payments, you’ll likely have to pay a late payment fee. In addition, if a payment is returned due to insufficient funds, some lenders will charge you a returned payment fee. These fees can greatly increase your borrowing costs.
Lenders typically report a late payment to the credit bureaus, which means your credit score can suffer serious damage. This can make it harder for you to qualify for future loans and get the best interest rate. Enroll in the lender’s automatic payment program if it has one to reduce your chances of missing a payment.
Is debt consolidation a good idea?
Debt consolidation may be a smart move for those with good credit who want to streamline their debt payments and potentially secure a lower interest rate. However, it’s not a guaranteed solution and should be weighed against other options. Consider using a debt consolidation calculator to determine if consolidating is right for you.
Alternatives to debt consolidation
If debt consolidation isn’t right for you, consider these alternatives:
- Debt management plans: Work with a credit counselor to set up a structured repayment plan.
- Debt settlement: Negotiate with creditors to pay a reduced amount.
- Balance transfer credit cards: Transfer high-interest debt to a card with a 0% introductory APR.
- Snowball or avalanche methods: Pay off debts from smallest to largest (snowball) or highest interest to lowest (avalanche).
Bottom line
Debt consolidation can be a powerful tool for paying off debt faster and potentially saving on interest. Before you apply, it’s important to weigh the costs, consider your credit score and explore all available options to make the decision that’s best for your financial situation.
Read the full article here
