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For Your Life May 4, 2021

The Pros and Cons of Debt Consolidation

With interest rates currently at historic lows, debt consolidation is top of mind for many people looking to tackle their high-interest debt. Debt consolidation provides you with a new loan that pays off existing debt, leaving you with one loan instead of several. This can be helpful if the interest rate on your new loan is lower than those of your current debts.

However, there’s more to debt consolidation than paying off credit cards by way of a new low-interest loan. The decision to consolidate your debt should hinge on a few factors about your personal finances. In fact, there are several pros and cons for debt consolidation that might impact how, when, and why this opportunity could or could not be right for your financial goals.

The Pros of Debt Consolidation

For many borrowers, debt consolidation has several advantages, including:

  • Lower Interest Payments: Debt consolidation often means paying a lower interest rate than you might with your existing debt. This is especially true for most forms of credit card debt, as credit card interest rates usually exceed what you would pay with a debt consolidation loan.

  • Stable Repayment Schedule: When you consolidate your debt into a single loan, you know exactly what you owe, when it’s due, and how long it will take you to pay it off. If you’re paying off debt across several credit cards or loans, tracking what you owe, when it’s due, and how long you have left on the balance can be harder to track.

  • Streamlined Finances: Keeping track of different debts can be a challenge for even the most organized person. Consolidation can make it easier for you to keep track of your debt more easily as you reduce the number of bills coming in and payments going out.  

These are just a few of the major advantages that debt consolidation might offer. There could also be additional benefits, which depend on your own financial situation and the terms of your consolidation loan. 

The Cons of Debt Consolidation

Debt consolidation might not be right for everyone, however. There are several circumstances in which consolidating debt might not be the best approach to tackling your existing loans and credit card debt. Some of the potential downsides of debt consolidation include: 

  • Upfront Costs: Debt consolidation loans may come with one or several costs. These typically include loan origination costs, balance transfer costs, closing costs, and annual costs. These additional costs may negatively impact the amount you’d save through consolidation.

  • Higher Interest Rates: Consolidating your debt doesn’t guarantee you’ll pay less in interest on your balance. Depending on your credit score, you may not qualify for a lower interest rate. You’ll still benefit from having all of your existing debts rolled into one new loan, but could end up paying the same—or more—in interest every month.

  • Consolidation Doesn’t Fix Your Finances: Consolidation is only one piece of the puzzle when paying off outstanding debts. You’ll still need to make sure you can pay off the new loan, stay on top of other bills, and take positive steps to improve your credit.

Consolidating your debt might be a smart financial move. Ultimately, deciding if it makes sense to do so depends on your own financial situation. There are plenty of advantages—and potential pitfalls—to pursuing a debt consolidation loan. Be sure to talk with a financial professional before making a decision on whether debt consolidation is right for you. 

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