The Pros and Cons of Debt Consolidation & Methods

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Updated on Thursday, September 13, 2018

Pros and Cons of Debt Consolidation

As of June 2018, Americans carry over $1 trillion in revolving debt, according to data from the Federal Reserve. And carrying debt can be troublesome if it has high interest rates. Credit cards, for example, had an average rate of 15.54% in the second quarter of 2018. That can make it hard for you to manage payments and pay down your debt sooner.

While it would be nice to wish our debt away, you may be considering the next best option: debt consolidation. It could help you save money and potentially pay down debt faster.

Like any financial strategy, debt consolidation isn’t perfect. There are pros and cons to consider anytime you restructure your debt or take out a new loan.

Pros of debt consolidation

The advantages of debt consolidation are often important enough for consumers to overlook any potential downsides. That’s because debt consolidation has the potential to save you money while getting you out of debt.

Here’s a rundown of how debt consolidation could help you save money, along with the additional advantages that come with this strategy.

1. You could repay your debt sooner

One of the biggest advantages of debt consolidation is the potential to save money and time on your debt, said financial planner Justin Pritchard of Approach Financial in Montrose, Colo. One goal of debt consolidation is to get a lower interest rate. With a lower rate, more of your payments are going toward your principal balance each month.

Imagine you have $6,000 in credit card debt at an APR of 15%. If you made a minimum payment of $120 each month, you’d pay a total of $9,473 over seven years. But if you consolidated your debt into a personal loan with an 8% APR and made the same monthly payment, you’d repay a total of $7,323 over five years instead. That’s a savings of more than $2,000 and two years of loan payments.

Pritchard notes that high interest rates make it difficult to pay down debt, whereas a lower rate can help you make a bigger dent in your balance with each monthly payment you make. If you’re able to consolidate to a lower rate and keep making the same monthly payment, you can make a lot of progress in a shorter amount of time. Use our table below to compare multiple offers in minutes to get the lowest interest rate!


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2. You could simplify your finances

Financial planner Neal Frankle of Credit Pilgrim said debt consolidation can simplify repayment. If you have a lot of different accounts, he said, it’s easy to get disorganized and miss a payment. This could lead to both late fees and a ding to your credit score, which wouldn’t help your situation.

By consolidating your debt into a single new loan, you can go from multiple monthly debt payments down to one. This could make it easier to stay on top of your payments and focus on your end goal, Frankle said.

3. You may be able to secure a fixed repayment schedule

Financial adviser Fred Leamnson noted that revolving debt, such as credit card debt, may be harder to pay off if you’re still using credit. If you continue spending on your credit card while you make payments, you can get stuck in a cycle where your new credit card charges outpace any progress you make.

If you consolidate debt with a personal loan, you could opt for a fixed interest rate. That would make your monthly payment and repayment period easier to manage. Plus, you couldn’t tack on more debt to your personal loan. Just be wary of accumulating new debt on your paid-off credit card.

Cons of debt consolidation

While securing a lower interest rate can help you save money on your debt, consolidating with a personal loan or another financial product does come with risks.

Some of the main disadvantages of consolidating your debts include:

1. Consolidating your debt won’t solve your financial problems on its own

Financial planner Dan Kellermeyer of New Heights Financial Planning said debt consolidation may not provide a long-term solution if you have trouble controlling your spending.

“For people who have bad spending habits, I would recommend seeking help from a budget coach or financial planner first,” he said. That way, you can get to the root of your problem and prevent a situation where you consolidate debt but continue racking up new debt.

2. Debt consolidation can cost money on its own

Depending on how you choose to consolidate your debt, you may have to pay upfront costs. For example, personal loans can come with origination fees from 1 percent to 8 percent. Home equity loans, on the other hand, come with closing costs similar to those of a traditional mortgage.

These costs or fees can offset your savings, Pritchard said. For that reason, you should factor in any fees you’ll pay to ensure debt consolidation is worth it. Also consider looking for debt consolidation options that don’t charge any fees.

Pros & Cons of each debt consolidation method

Before you consolidate debt to save money or speed up your repayment timeline, you may want to consider the different loan options available. Consider this breakdown of the popular debt consolidation methods, along with their pros and cons.

What it is

A balance transfer card is a type of credit card that offers 0% APR for a limited time. These cards may let you transfer multiple credit card balances and loans over to the new rate, helping you save money on interest and score a single monthly payment.


  • If you can pay off your debt during your card’s 0% introductory term, this option is basically an interest-free loan.

  • It’s easy to research and apply for balance transfer cards online.

  • Some balance transfer cards don’t charge any fees to transfer your balance.


  • Most balance transfer cards charge a 3% to 5% fee to transfer your balance.

  • If you continue using your credit card after you consolidate, you may have trouble paying off your debt before the promotional period ends.

  • You could temporarily impact your credit because you’re adding hard inquiries to your credit report, noted Pritchard. “If you’re in credit-building mode, that may impact your ability to get a great deal on a mortgage or car loan,” he said.

  • Your introductory APR won’t last forever. While you may get 0% for up to 20 months, your card’s rate will rise after the promotional period.

Who is it best for?

Balance transfer cards make the most sense for people with high credit scores because they can usually qualify for the promotional rates. These cards are also best for consumers who can stop using their credit cards so that they can focus on paying off their debt for good.

Where to find the best offer

Check our marketplace for balance transfer cards. Consider the length of each promotional period and fees.

What it is

A debt consolidation loan is a personal loan used to consolidate debt. Personal loans come with a fixed interest rate, monthly payment, and repayment schedule.


  • Personal loans can offer attractive interest rates that can help consumers save money in debt repayment.

  • Debt consolidation loans help you create a debt payoff plan. “These loans can help set a timeline for wiping out your debt,” Frankle said. “That structure is really helpful for some people.”

  • While a balance transfer card could leave you tempted to continue using it for purchases, this isn’t an option with a personal loan. That could mean you’re better able to stick to your financial goals.


  • While debt consolidation loans can lower your monthly payments, you may end up paying more in interest if you stretch out your repayment timeline, Kellermeyer said.

  • Consolidating debt only moves your debt, and it could make it easier to rack up more. “You don’t actually reduce the amount you owe, and consolidating can free up your credit cards and tempt you to spend more,” Pritchard said.

  • The interest rate may be higher on these loans than with some other options.

Who is it best for?

Debt consolidation loans are best for consumers who need a structured way to pay off their debt. They’re also a smart option for consumers with high credit scores since they may be able to qualify for the lowest interest rates.

Where to find the best offer

Compare lenders using our debt consolidation loan marketplace. Double-check lender fees, rates, and borrowing limits.

What it is

A home equity loan is a fixed-rate debt that uses the equity you have in your home as collateral. You’ll have a fixed monthly payment and repayment timeline.


  • Since this is a secured loan, you may qualify for a lower interest rate than you could get with other debt consolidation options.

  • You can refinance revolving debt such as credit card debt into a loan product with a fixed interest rate and fixed monthly payment.


  • You can only borrow up to 85 percent of your home’s value with a home equity loan. So this option may not be available to some homebuyers.

  • Home equity loans may come with costs such as an application or loan processing fee, an origination or underwriting fee, a lender or funding fee, an appraisal fee, document preparation and recording fees, and broker fees.

  • You could lose your home to foreclosure if you don’t repay this loan.

Who is it best for?

“A home equity loan might make sense if you have significant equity in your house, a secure income source that’s going to keep you out of foreclosure, and you really want to minimize your interest rate,” Pritchard said.

Where to find the best offer

Start your search by reviewing our guide to home equity loans. Weigh the benefits of a home equity loan compared with the idea of using your home as collateral.

What it is

A home equity line of credit (HELOC) is a line of credit that lets you borrow against the equity in your home. HELOCs typically come with variable interest rates.


  • Since HELOCs are secured by the equity in your home, they can offer attractive interest rates.

  • HELOCs don’t require you to borrow a set amount. Instead, you get the option to borrow amounts that you need up to a preset limit.


  • HELOCs can come with fees, including for applications, title searches and appraisals. But not all HELOCs charge these fees, so make sure to shop around.

  • Since you only have to repay amounts you borrow, your monthly payment can vary widely.

  • HELOCs typically come with variable interest rates, meaning your payment could go up or down throughout the life of your loan.

  • You can only borrow up to 85 percent of your home’s value, so this option is only good for those who have a lot of home equity.

Who is it best for?

HELOCs are best for consumers who have a lot of equity in their homes and want a line of credit to borrow against.

Where to find the best offer

Kick-start your search by learning more about HELOCs. Consider comparing your options for a HELOC with a balance transfer card. Review rates as you shop lenders and ensure you’re comfortable with using your home as collateral.

What it is

Debt management plans are overseen by credit counseling agencies, according to Kevin Gallegos, vice president of new client enrollment at Freedom Debt Relief. With these plans, consumers make a monthly payment that’s used to pay their creditors based on a payment plan that’s agreed upon by all parties. This type of plan may land you a lower interest rate and reduced fees.


  • Gallegos said a debt management plan could “simplify bill-paying by combining debts to obtain one interest rate and one payment.”

  • Joseph Martin, a credit counselor with Take Charge America, a national nonprofit credit counseling and debt management agency, said credit counseling agencies do a lot of the work for you with these plans. “With a debt management plan offered through a nonprofit credit counseling agency, a credit counselor works on your behalf to negotiate more favorable terms with each creditor. ... Once you make your single payment each month, they also take steps to disburse the funds for you on your behalf.

  • A debt management plan could help you secure a lower interest rate, Gallegos said. “As a result, you can more easily meet your monthly budget, or pay more than the minimum to repay your debt more quickly.”


  • Debt management plans typically charge a monthly administration fee. These fees can add up over the course of a debt management program. But these fees can be offset by the interest you save.

  • If you enroll in a debt management plan, you need to stop using your credit cards to receive the full benefit. “That can be a big challenge for some,” Gallegos said.

Who is it best for?

Gallegos said debt management plans are best for consumers with less than $7,500 in unsecured debt who can make monthly payments, and who would benefit from a slightly lower interest rate.

Where to find the best offer

Martin said you can take part in a confidential, free credit counseling session at a nonprofit agency. Consider checking in with the National Foundation for Credit Counseling.

The bottom line

Consolidating debt can be a good move if it helps you save money or repay your debt faster. But it’s important to consider all your options before you pull the trigger.

The right debt consolidation method for you can vary. Consider what kind of debt you have and how much you have of it, your current interest rates and which consolidation methods are available. By doing some research, you can wind up with the best debt consolidation product for your unique needs.

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