Debt Consolidation
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LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

Pros and Cons of Debt Consolidation

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Content was accurate at the time of publication.

Tracking multiple loan and credit card payments can make it challenging to stay organized. It can also make it difficult to decide which accounts to pay off first. Debt consolidation combines all your debt into a single balance, making it easier to pay off faster. Depending on your credit and financial position, the pros and cons of debt consolidation may indicate whether this route is a good fit for you.

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4 pros of debt consolidation

As long as you have strong credit and market interest rates are low, a debt consolidation loan may be a solid solution you could explore.

1. Lower interest rates

If you have a good credit score, qualifying for new interest rates that are lower than your current ones can be much easier. This is especially true if you want to use a personal loan to pay off a credit card. As of May 2023, the average credit card annual percentage rate (APR) was 20.68% while the average 24-month personal loan APR was 11.48%, according to the Federal Reserve.

The lower your interest rate, the less a debt consolidation loan can cost you. A good credit score is considered to be at least 670 on the FICO Score model and 661 according to VantageScore.

2. Faster debt repayment

You may become debt-free much faster with a debt consolidation loan, especially if you’re trying to pay down on credit cards or a long-term personal loan. When you apply for a debt consolidation loan, you can elect to take on a short-term personal loan, which can range anywhere from 12 to 36 months.

Aside from paying off your debt faster, you can also save on interest. While you might have a higher monthly payment, you’ll pay less in interest over the life of the loan.

3. Simplified finances

If you are juggling multiple credit accounts, debt consolidation can streamline the process by combining them into a single monthly payment. This can help you track your bills without missing any payments. To see how consolidating debt could help you, list each of your bills on LendingTree’s debt consolidation calculator.

This organized approach can be applied even if you need a debt consolidation loan for bad credit. However, if you have less-than-ideal credit, you’ll want to make sure you keep up with payments as it can damage your credit even more if you don’t pay on time.

4. Improved credit score

As you continue to make payments on your consolidated debt, your personal loan can influence your credit score over time — but how? As you make payments, your lender will report them to some or all of the credit bureaus. Your payments will then be recorded on your credit reports, which will ultimately impact your score.

Keep in mind, a debt consolidation loan affects your credit score by causing it to drop by less than five points when you initially apply. For context, both FICO Score and VantageScore range from 300 to 850.

4 cons of debt consolidation

Before agreeing to take on a debt consolidation loan, consider the drawbacks that could potentially put you in a sticky financial position.

1. May come with extra costs

Converting your debt into a debt consolidation loan won’t be completely free. Since debt consolidation loans are a type of personal loan, some lenders may charge you an origination fee. These are one-time administrative fees that are typically taken out of the total balance of your loan amount.

Aside from that, while they’re not common except with mortgage companies, your current lender may charge you what’s known as a prepayment penalty. This is a fee some lenders charge if you pay a loan off before its repayment term ends.

2. Won’t solve financial problems

If you’re overwhelmed by debt or struggling to curb your spending habits, a debt consolidation loan won’t be a quick fix to your financial challenges. Instead, it may be better to seek strategies that can help you navigate your current situation until you’re in a position where a debt consolidation loan may be helpful.

Compare credit counseling vs. debt consolidation if you’re having a hard time managing your current debts. A credit counselor can help arm you with the tools to budget to pay off your debt and even work with your lenders on your behalf. If you meet the criteria, a credit counselor could even enroll you in a debt management plan.

3. Lower rates aren’t guaranteed

If you have bad credit or a spotty credit history, lenders may only offer you higher APRs than what you’re currently paying. This can defeat the purpose of debt consolidation, as you’ll want to save money on your new loan aside from paying off your current debt faster and streamlining your bills.

Instead, consider improving your credit score before you apply for a debt consolidation loan — this can land you better rates and get you in with lenders that offer better features. If you can’t wait, however, you can also shop around for personal loans for bad credit to merge your debt.

4. Missing or late payments can damage credit

If you take out a debt consolidation loan and miss a payment, this can damage your credit score. Missed or late payments can be one of the most influential factors on your credit scores, so if you don’t think you can keep up with your monthly payments, debt consolidation may not be a good fit for you.

If you don’t pay back a loan, the consequences can go even further than just your credit score. Defaulting on a loan can send your account into collections and your lender may even eventually file a lawsuit to get you to pay back your loan.

When you should consolidate debt

If you have good-to-excellent credit and market rates are low, debt consolidation may be a good idea. In particular, a debt consolidation loan may be a good fit if you’re trying to consolidate credit card debt. Since credit cards don’t come with terms, you could be paying them off for a long time. Debt consolidation loans, on the other hand, can give you a clear timeline of when your repayment will be done.

As previously mentioned though, debt consolidation isn’t for everyone. For instance, if you’re struggling to manage your current debt, you may need to address that before you should apply for a debt consolidation loan. Instead, consider some of the following alternatives in order to manage your debt:

Frequently asked questions

Pros include clear repayment terms, potentially lower rates, streamlined finances and the opportunity to improve your credit score. On the other hand, there’s no guarantee you’ll be offered low rates, your financial situation may not improve and you may have to pay more in fees.

The benefits of debt consolidation heavily depend on whether you have a good credit score, if you can afford the extra fees you may have to pay and your ability to keep up with the monthly payments. If so, this financial strategy can be a good way to get out of debt faster.

If you have bad credit and are struggling to keep up with paying your bills, debt consolidation may not be a good idea. Instead, you may need to consider more serious alternatives. Consider debt consolidation vs. debt settlement or debt consolidation vs. bankruptcy (in extreme cases).

When you take out a debt consolidation loan, your lender will run a hard credit pull on you which will stay on your credit report for up to two years. However, any missed payments on your loan can stay on your reports for up to seven years. You can check your credit reports for free to see what items may be impacting your credit score.

Since debt consolidation loans are typically unsecured (meaning they don’t require collateral), lenders will lean heavily on factors like your credit score and debt-to-income ratio. This can make it difficult for those with bad credit to qualify for a personal loan.

Because a lender will perform a hard credit pull when you take out a debt consolidation loan, your credit score may dip — but only by a few points. Overall though, as long as you pay on time, debt consolidation may actually help your credit.

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