Are Debt Consolidation Loans Worth It? How to Decide

Knowing if consolidation is right for you comes down to your personal situation
Last updated Aug. 25, 2022 | By Christy Rakoczy

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Figuring out if a debt consolidation loan is worth it largely depends on your personal situation. In a nutshell, it’s a loan that helps you pay back all the lenders you owe money to in order to wipe out your debt. But as helpful as they might be, they’re not right for everyone.

Some people decide they have had enough with managing multiple payments on a monthly basis and opt to consolidate with a personal loan, balance transfer card, or by partnering with a debt consolidation company.

Whatever the case, if you're thinking about how to get a loan and this is something you want to explore, there are different kinds of debt consolidation loans to know about.

Before making a decision, you’ll want to:

  • Understand your options and how the process works
  • See what loan terms you qualify for
  • Make an informed choice on whether it’s worth it for you

When Debt Consolidation Loans Are Worth It

1. They Reduce the Cost of Paying Back Your Loan

If you can reduce both your monthly payment and the total interest paid over the life of the loan, consolidating loans can be a good idea.

If you are able to qualify for a debt consolidation loan at a lower interest rate, it's usually worth taking out the loan. But, you'll also need to consider the impact of the repayment timeline because the time to repay your loan affects both monthly payments and total repayment cost.


Let’s say you want to consolidate these three debts:

  • A $2,000 credit card balance at 15% on which you're currently paying $50 monthly
  • A $6,000 credit card balance at 17% on which you're currently paying $150 monthly
  • A $10,000 personal loan at 12% on which you're currently paying $240 monthly

If you're able to obtain a debt consolidation loan at 7.49%, your interest rate could drop considerably.

However, your monthly payment and savings from consolidating vary depending on the repayment timeline:

  • 24-month term. If your consolidation loan had a 24-month term, your monthly payment would be around $809, which is $369 higher than the $440 you're currently paying. Your payment would rise, even though your interest rate is way lower. But you'd reduce your timeline to pay off your loans by 2.65 years and would pay $3,812.14 less in interest.
  • 48-month term. Your monthly payment would be $443.58, which is close to the payment you currently have. You would reduce your payoff timeline by .65 years and would save $1,957.94 in interest.
  • 60-month term. Your monthly payment would be $377.95 You'd drop your payment by $102 and would save $573.27 in interest.

In each of these cases, the consolidation loan would be worth it. You'd be reducing the total cost of paying back your loan, and would either be lowering your payment or shortening your repayment timeline — or both.

When you compare interest rates to decide if your loan is worth it, make sure to look at total interest cost. The Consumer Financial Protection Bureau warns some debt consolidation loans have low teaser rates, but the rates go up and the loan ends up being costlier in the end. Our list of the best personal loans is a good place to start your search.

2. You’re Struggling to Pay Back Your Debts

Debt consolidation loans are also worth it if they spare you from going into collections because of debts you can't pay back.

Sometimes, the monthly payments on your debt will be too much for you — perhaps because you have a loan with a short repayment timeline or because you owe many lenders and the minimum payments required by each lender add up to more than you can handle.

If that's your situation, consolidating debt could allow you to get more wiggle room in your budget. If you could reduce your monthly payment to an affordable level — either by reducing your interest rate or stretching out your repayment timeline — you could spare yourself from having legal action taken against you and could make sure you don't take a hit to your credit caused by late payments.

3. When Variable Rate Loans Become Fixed Rate Loans

Most debts you have are either a fixed rate or variable rate loan.

A fixed rate loan has the same interest rate the entire time you're paying back the debt. Because the interest rate never changes, your monthly payment never changes either. You will know the exact amount of your monthly payment up front until the debt is paid off so you can plan your budget accordingly.

Variable rate loans, on the other hand, have fluctuating interest rates. The rate may stay the same for a specified period of time, but will then change periodically. The rate is usually tied to a financial index and it can move up and down. Two examples of variable rate loans are Prime Rate or LIBOR index. With a variable rate loan, as the interest rate changes, your monthly payments can also change. If rates rise, you could end up owing a lot more on your loan.

Many people are attracted to variable rate loans because the interest rates usually start lower than it would with a fixed rate loan. Unfortunately, it can be frustrating to cope with the uncertainty these loans provide — and it can be worrisome if your payment starts to rise because interest rates are going up.

If you have variable rate loans and you think rates are going to increase — or you're simply tired of dealing with the worry and uncertainty that comes from not knowing what your loan payments will be — you may decide to try for a lower, steady interest rate by taking out a new fixed rate debt consolidation loan to pay off the variable rate debts you owe.

This can sometimes make sense even if your interest rate will be a little higher when you take your new loan since you're protecting yourself against even bigger rate increases in the future.

When Debt Consolidation Is a Bad Idea

Debt consolidation can help improve your financial situation considerably in many instances, but it isn’t always the perfect solution.

For one, it doesn’t address the spending habits and circumstances that got you into debt in the first place.

Second, it may make more sense to DIY your debt repayment using the debt snowball or debt avalanche method — especially if you’re disciplined and have a reliable source of income.

It also won’t help if reducing the payments won’t make a difference in whether or not you’ll be able to pay back the debt. In that instance, you may be looking at considering a debt management or debt settlement plan — or even bankruptcy (although that should always be the last resort).

The Bottom Line

When you owe money on credit cards or have other high-interest debt, it's often worth it to drop your rate dramatically with a consolidation loan. Just be sure to carefully shop around for a lender offering reasonable terms, and do the math to ensure the loan you end up with will cost you less so paying it back is easier and you can reach your goal of getting out of debt with fewer hurdles in the way. 

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Author Details

Christy Rakoczy Christy Rakoczy has a Juris Doctorate from UCLA Law School with a focus in Business Law, and a Certificate in Business Marketing with an English Degree from The University of Rochester. As a full-time personal finance writer, she writes about all things money-related but her special areas of focus are credit cards, personal loans, student loans, mortgages, smart debt payoff strategies, and retirement and Social Security. Her work has been featured by USA Today, MSN Money, CNN Money and more, and you can learn more at her LinkedIn profile.