Are Debt Consolidation Loans Worth It? How to Decide

Consolidating loans can greatly improve your chances of getting out of debt, but are they worth it? Here's how to decide.
Updated May 18, 2023
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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 of managing multiple payments on a monthly basis and opt to consolidate with a personal loan, a balance transfer credit card, or by partnering with a debt relief company.

Whatever the case, if you're thinking about getting a loan and this is something you want to explore, there are different kinds of debt consolidation options to

In this article

How does debt consolidation work?

Debt consolidation is when you combine your debts and take out a new loan to help pay them off. This is done in single monthly payments instead of juggling multiple payments. 

Having multiple loans means keeping track of different payment due dates and lender policies. And the minimum payments you make on each loan can add up to a small fortune, making it difficult to manage your budget. 

While debt consolidation can sometimes make paying back debt easier, this isn't the case in every situation. You'll want to determine if consolidating your loans makes sense for you and, if so, how to get a loan.

Pros of debt consolidation loans

1. They can reduce the cost of paying back your loan

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

But you'll also need to consider the impact of the repayment terms because the time to repay your loan affects both monthly payments and total repayment costs.

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 with either a lower monthly payment or shortened repayment timeline — or both. Keep in mind, though, that some types of debt come with higher interest rates than others.

 Our list of the best personal loans is a good place to start your search. 

2. They may lower your monthly payments

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 bill 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. Variable rate loans can become fixed rate loans

Most debts you have are either fixed rate or variable rate loans. A fixed rate loan has the same interest rate the entire time you pay back the debt. Because the interest rate never changes, your monthly payment never changes either. Knowing the exact loan amount that you'll have to pay can help you 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. If rates rise, your monthly payment could change, and you could end up owing a lot more on your loan.

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.

4. It may improve your credit score

A new loan application may result in a temporary dip in your credit score because it triggers a hard credit inquiry. That being said, consolidating your debt can also improve your score over time. 

Paying off revolving lines of credit (like credit cards) can reduce the credit utilization ratio on your credit report. Ideally, your utilization rate would be under 30%, and consolidating debt may help you accomplish that. Ultimately, making on-time payments consistently and paying off the loan will improve your credit score in the long run. 

Cons of debt consolidation loans

1. It won't solve your financial problems on its own

Debt consolidation can help improve your financial situation considerably in many instances, but it isn’t always the perfect solution. It doesn’t address the spending habits and circumstances that got you into debt in the first place, so be sure you’re committed to pulling back on your spending and keeping it under control.

Otherwise, you could run into some issues and fall into a pattern because simply borrowing more isn’t a great way to become debt free. You still have to pay it back, or else risk ending up further in debt. This isn’t a guaranteed drawback, of course, but it does demonstrate why it’s so important to understand what debt consolidation means

For instance, if you use a balance transfer credit card offer and can't pay back the transferred amount prior to the promotional rate ending, the interest rate may increase substantially, depleting any interest you might have saved months prior. The same goes for a home equity loan. If you aren’t committed to sticking with the repayment plan, your house could be foreclosed on if you can’t repay the loan.

2. You may have to pay upfront costs

Since a primary goal of consolidating is to reduce costs associated with debt payment, it's important to look at the total expenses associated with your new loan.

To make sure you understand all of the fees you could owe, read the fine print of your loan terms. Look for origination fees, annual fees, balance transfer fees, administrative fees, and potential prepayment penalties if you decide to pay off your loan at an accelerated rate.

3. Your rate could be higher

Make sure to look at the total interest cost when you compare interest rates with your current debt to decide if your loan is worth it. The Consumer Financial Protection Bureau warns that some debt consolidation loans have low teaser rates, but the rates go up, and the loan ends up being costlier in the end. 

It doesn’t make sense to consolidate if doing so means you’ll be paying back your debt at a higher rate than what you’re starting out with. Your ability to qualify for a loan offer at a low rate depends on your credit history and income. If you have pretty good credit and a reliable source of income, you should be able to qualify for a consolidation loan at a reasonable rate. 

You might also be able to qualify for a balance transfer credit card with a promotional 0% annual percentage rate (APR), which could reduce the interest you pay down to nothing for as long as the promotional rate is in effect. Take a look at our list of the best balance transfer cards for more details.

Alternatives to debt consolidation

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.

Debt consolidation 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).


Does it hurt your credit score to consolidate debt?

Consolidating your debt may cause a temporary dip in your credit score. Credit applications usually trigger a hard credit check, which may lower your credit score by a few points for several months. 

But if you pay on time and stay out of debt after you pay it off, the overall credit effects of debt consolidation should be positive. 

What are the benefits of debt consolidation?

  1. You can turn multiple payments into a single payment.
  2. You may have lower interest rates.
  3. It can improve your credit score in the long run.
  4. You may be able to pay your debt off faster.

What are three disadvantages to consolidating your loans?

  1. It could damage your credit if you're unable to make your monthly payments.
  2. It can lead to more debt if you overspend using the newly available space on your credit cards.
  3. Your loan may have a prepayment penalty, so you'll be locked into a set payment period.

Bottom line

When you have credit card debt or 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. 

National Debt Relief Benefits

  • No upfront fees
  • One-on-one evaluation with a debt counseling expert
  • For people with $7,500 in unsecured debts and up

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.

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