Advantages and disadvantages of debt consolidation

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If you have high-interest debt, it may be a good idea to consolidate it. Discover the pros and cons of debt consolidation. (Shutterstock)

If you have high-interest credit card debt, have trouble making loan payments, or have trouble keeping up with multiple payment due dates, debt consolidation may be right for you. a good option, especially if your credit score has improved since you took out your loans.

While consolidating high-interest debt with a personal loan or balance transfer credit card might make sense in some situations, it’s not for everyone. Let’s dive deeper into how debt consolidation works, along with some pros and cons you’ll want to consider.

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What is debt consolidation?

Debt consolidation involves taking out a new loan and using the funds to pay off your original debt. You can consolidate your debt with a personal loan, balance transfer credit card, home equity loan, or home equity line of credit (HELOC). Here are some common types of debt consolidation.

Debt consolidation with a personal loan

If you pursue debt consolidation with a personal loan, you can lower your interest rate, improve your loan terms, and streamline your monthly payments. You can find debt consolidation loans at banks, credit unions and online lenders. If you can get a personal loan with a lower interest rate, you may find it easier to pay off high-interest debt and get out of debt faster.

You can compare personal loan rates from various lenders using Credible, and it will not affect your credit score.

Debt consolidation with a balance transfer credit card

When you consolidate credit card debt With a balance transfer credit card, you sign up for a new credit card, ideally with a low interest rate or 0% APR introductory offer for a certain period. Then you transfer your existing card balances to the new card and make one payment per month.

Debt consolidation with a home equity loan or HELOC

Consolidating debt with a home equity loan or home equity line of credit (HELOC) may be an option if you have positive home equity (the difference between what you owe on your mortgage and the value current home).

If you are approved for a home equity loan, you will receive a lump sum of money up front and can then use the money to pay off your existing debts. Then you’ll start making home equity loan payments on the amount you borrowed, plus interest. HELOCs are also a type of second mortgage, but they are a line of credit that you can draw on as needed, up to your credit limit.

If you use one of these options to consolidate your debts, you may be able to get a lower interest rate than a debt consolidation loan because your home will act as collateral to secure the loan.

Advantages of debt consolidation

A part of the most notable benefits of debt consolidation include:

You can get a lower rate

The biggest advantage of debt consolidation is that you can lock in a lower interest rate and save a lot of money in interest. Depending on the strategy you choose and the amount of your debt, this can be hundreds or even thousands of dollars. You can use this extra money to pay off your debt faster, increase your emergency fund, or achieve any other short- or long-term financial goals.

You will only have one monthly payment

Keeping up with multiple monthly payment schedules is not easy. Debt consolidation allows you to combine your debts into one new monthly payment with a fixed interest rate that will remain the same for the life of the loan (or during the promotional period with a balance transfer card). Simplifying your debt repayment can give you a clearer path to debt relief sooner and make the process less overwhelming.

You can get out of debt faster

If you consolidate your debt at a lower rate, you can use the money you save on interest to get out of debt faster. You’ll be able to apply the money saved in interest to your remaining balance and shorten your repayment term, which can help you save even more. To really speed up your debt repayment mission, try getting a balance transfer card with a 0% APR introductory offer.

Disadvantages of debt consolidation

Before going ahead with debt consolidation, consider these disadvantages:

You may need to pay a fee

The lender and the debt consolidation strategy you choose will determine the type of fees you may be responsible for. If you take out a personal loan, for example, you’ll likely have to pay an origination fee or an application fee to process the loan. Consolidation with a balance transfer card usually comes with a balance transfer fee of 3% to 5% of the amount you transfer, while debt consolidation with a home equity loan may include closing costs.

You are not guaranteed a lower interest rate

In a perfect world, you’d be able to lock in a lower interest rate on a personal loan, balance transfer card, or home equity loan so you could really save when you consolidate debt. But the reality is that the lowest rates are reserved for those with strong credit. If you have fair or bad credityou may find it difficult to qualify for the low interest rate that makes debt consolidation attractive.

Your debt may return

Debt consolidation is a strategy to help you get out of debt. If you tend to overspend, your debt may come back. While debt consolidation may be a smart move if you’re currently in debt and want to get out of it, it won’t solve the root of the problem or solve any spending or saving issues you may have.

When debt consolidation makes sense

Debt consolidation can be interesting if:

  • You have strong credit and may qualify for a lower interest rate. If you have good or excellent credit and can get a lower rate than you’re currently paying, debt consolidation can save you money on interest and even help you pay off your debt longer. rapidly.
  • You want to simplify the payment process. If you have several monthly payments with their own due dates and you decide to consolidate your debts, you will only have to worry about one payment.
  • You work hard to control your spending. If you used to spend too much, but are taking steps to manage your budget and living within or below your means, debt consolidation can help you achieve a debt-free lifestyle.

Of course, debt consolidation doesn’t make sense in some scenarios. If you have a small debt that you can pay off quickly, it’s probably not worth it, especially if you have to pay fees.

If you don’t have the best credit or your credit score is lower than when you originally incurred your debt, you may have difficulty getting approved for a low interest rate or credit card. loan or balance transfer that actually allows you to pursue debt consolidation. .

How to get a debt consolidation loan

If you want to take out a debt consolidation loan, follow these steps:

  1. Check your credit score. Go to a website that offers free credit scores (like You can also request your credit score from your lender, credit card issuer, or credit counselor. This way, you know where your credit stands and have an idea of ​​what kind of interest rate you might qualify for.
  2. List your debts and payments. Create a list of all the debts you want to consolidate, including credit cards, payday loans, store cards, and any other high-interest debt. Add them up to find out how much debt you have and how much debt consolidation loan you need.
  3. Shop around and compare options. Explore debt consolidation loans from various banks, credit unions and online lenders. Compare the rates, terms, and fees of each option to make the best decision for your unique situation.
  4. Apply for a loan. Once you are ready to apply for a loan, complete the application online or in person. Be prepared to submit documents such as your government-issued ID, W-2s, pay stubs, and bank statements.
  5. Close the loan and make the payments. If the lender is paying your creditors for you directly with the funds from your debt consolidation loan, check your accounts to make sure they are paid. If the lender does not pay the creditors directly, you will have to repay each debt with the money you receive.

If you are ready to apply for a debt consolidation loan, Credible allows you to compare personal loan rates from various lenders, all in one place.

Does debt consolidation affect your credit?

Debt consolidation can temporarily take a toll on your credit. When you apply for a personal loan or balance transfer card, the lender will do a thorough credit check, which can lower your credit score by a few points. Additionally, when you open a new credit account and reduce the average age of your account, your credit score will likely decrease as well.

The good news is that debt consolidation can also improve your credit. Since this will reduce your credit utilization rate, or the amount of available credit you use, you may be able to counter some of the negative effects of opening a new account. Plus, if you commit to making full payments on time each month, you’ll improve your payment history and boost your credit score while you’re at it.

What credit score do you need to get a debt consolidation loan?

Credit score requirements for debt consolidation loans vary by lender. But in most cases, you’ll need a credit score of at least 650. If your score is lower, don’t worry. Some debt consolidation lenders can accept credit scores of 600 or even lower. Remember that a lower credit score will likely mean a higher interest rate, which could frustrate your debt consolidation plan.

Nancy I. Romero