Should I Consolidate My Loans? The Smart Way to Decide

How to determine if loan consolidation is right for you

Updated June 26, 2024
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If you’ve racked up a good amount of debt and are slowly paying it down, you may be thinking about how to get a loan to consolidate your debts. One reader asks:

Should I consolidate my loans? I’m making payments but it still feels like I’m drowning in debt that will never go away.

Fearing that your debt may never go away is more common than you might think. In fact, 68 percent of U.S. adults don’t know when or if they will ever be completely debt free, so it’s no wonder you might share some of those same feelings.

Thankfully, though, you still have options — even if you have bad credit or feel like you’ve exhausted all of them.

Debt Consolidation Works, But You Still Have To Pay The Debt Back

Whether all of your debt is wrapped up in credit cards, student loans, or a combination of different types of debt, consolidating everything together into a single payment is possible, but before making the decision, it’s important to understand the basics.

First, understanding how consolidation works can help you decide which strategy might make the most sense for you. Also, it’s important to understand that while debt consolidation does indeed work, it doesn’t mean your debt will magically disappear. There are still pros and cons to weigh. You’re still on the hook for being responsible to pay back the debt you owe, ideally at a lower interest rate and in a specific timeframe.

Here’s a walkthrough of what you should consider before making a decision and some different consolidation options that might make sense for you.

What to Consider When Contemplating Loan Consolidation

When considering loan consolidation, there are three key factors you’ll want to keep in mind:

  • Interest rates
  • Life of the loan
  • Avoiding new debt

This simplified overview can give you a good understanding of how to answer your own question. There is no single answer that’s right for everyone, so weighing the ins and outs based on your personal financial situation is what’s best.

Interest Rates

Ask yourself: Can I get a lower interest rate?

Debt consolidation will result in a single interest rate that is the weighted average of your current interest rates combined. Occasionally, you might get lucky and find that the company consolidating your debt offers you an interest rate lower than that weighted average.

It’s more common to get lower interest rates with refinancing, but it does sometimes happen when loans are consolidated. If for some reason the new interest rate is higher than the weighted average, that’s an indicator that you might want to consider another form of debt repayment or consolidation for the time being.

Life of the Loan

Ask yourself: Am I nearer to the end of a repayment period on some debts than others?

If the answer is yes, you’ll be extending the life of those loans by consolidating them with other debts. That means you could pay more on the loan in the long run even though the interest rate might be lower.

Here’s an example to consider — Let’s say you have one loan with a principal balance of $1,000 and an interest rate of 15% with 12 months left. That’s $1,083 you’ll pay in total for the life of that loan. If you consolidate, the interest goes down to 10%, but now that you have 36 payments on it (instead of 12), you’ll pay $1,161 on that loan. You could save $78 if you choose not to consolidate.

A way around this might be to ask if you can consolidate debts that have similar repayment periods and continue making payments on ones that will be paid off sooner. Remember, you don’t have to consolidate every single debt owed.

Avoiding New Debt

Ask yourself: Will I drive myself back into debt when this is all over?

Building credit is important but if you have shown a pattern of not being able to keep your credit card balances low, you might need to consider closing them during and after a debt consolidation.

Taking out a personal loan to consolidate credit card debt and then maxing your cards again can put you in seriously bad financial shape. In that case, your best bet is to either commit to keeping your spending reasonable and within your limits, or consider taking the hit on your credit score by closing the accounts. That credit hit will be more temporary than the damage you might do if you rack up more debt.

Loan Consolidation vs. Loan Refinancing

After considering the factors above, it’s time to shift focus to the differences between loan consolidation and refinancing. These terms are NOT interchangeable. You might hear some people refer to them like they are the same thing, but they are very different.

When you’re consolidating your loans, you’re merging your debt together into a single monthly payment. You might be taking two, three, or more loans and essentially making them a single loan.

Refinancing on the other hand, means lowering the interest rate that you currently have attached to your debt. For example, one loan may be earning 10% interest, and after refinancing, you could have a new interest rate of 7%. In the long run, this saves you from paying more interest on your debt since less interest is accruing over time.

Pros & Cons of Loan Consolidation

The main benefit of consolidating your loans into one loan is having one payment each month. You’ll greatly diminish the chances you’ll panic about making a late payment or missing one. You can write one date on your calendar instead of multiple. You can mail one check instead of multiple or only worry about remember one set of login information. No more mixed up usernames and passwords! Wouldn’t that be a relief?

However, there’s no guarantee that you’ll save money in the long run, as some debts may carry the same interest rates. A reputable debt consolidation provider can calculate the weighted average of everything you owe to create a single interest rate based on a variety of factors. That new interest rate may be lower than some of your original loans, but in some cases, it might be higher as well. Thankfully, there’s no obligation in getting a quote or talking with a representative.

Lastly, consolidation does lower the total amount you pay each month but in some cases could also draw out the life of the loan in total. Even though you’ll be able to afford your new, lower monthly payment, you could be paying more money in the end due to having an extended loan period. This, of course, has benefits and drawbacks but the answer lies within assessing your own financial situation and whether or not you can swing the monthly payments or need a lower payment due in order to stay current with repayment.

Pros & Cons of Loan Refinancing

The purpose of refinancing is to award your credit and payment history with a lower interest rate. A lower interest rate means less money you’ll owe for the life of your loan. If you have a good payment history with a loan and your credit score has improved, it’s worth trying to refinance in order to save money.

A drawback with refinancing is you’ll need to do it with each line of debt separately, which can be a hassle (although sometimes worth it). Unlike consolidation, your payments stay separate and you’ll be responsible to making each one on-time every month.

You’re also not guaranteed to get the same low rates from different lenders, as they pull from similar but different sets of criteria. Depending on the status of your debts, some lenders may not even offer you an option to refinance at all. Also, you’ll still have multiple payments instead of the single payment that consolidation gets you as an end result.

Will consolidation hurt my credit score?

Your credit score can be affected differently depending on how you decide to consolidate your debt. Part of the consolidation process is applying for a new loan, so that hard inquiry on your credit report may have a temporary impact on your score. The same happens when you apply for a new loan or credit card.

However, if you take out a personal loan to pay off credit card debt, you might notice your score increase. If you keep the credit cards open after paying them off with your personal loan, your credit availability goes up along with your credit score once it’s reported to the credit bureaus, which can have a positive impact in the long run. 

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Lauren Stewart

Lauren Stewart is a freelance writer and personal coach. Get to know her!