Is Debt Consolidation a Good Idea? Here’s What to Consider

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If you’ve amassed a substantial amount of debt, you’re likely feeling overwhelmed and on the hunt for a solution. For many people, debt consolidation with a personal loan or balance transfer credit card may be an appealing option. These avenues — and even consolidation itself — aren’t for everyone, however. In this article, we’ll break down what you need to consider so you can make the best choice for your finances.

Debt consolidation: Pros and cons

Debt consolidation is a debt management strategy that involves rolling all of your unpaid balances into one method of financing. When utilized responsibly, debt consolidation can ultimately save you a lot of money in interest because some of these methods involve pooling your debts to pay them off at a lower rate overall. Additionally, it can help to ease some of the general stress debt can bring, as it frees you up from having to keep track of multiple bills and due dates.

It’s important to take the time to assess your individual situation to determine if debt consolidation would be the right choice for you, according to Leslie H. Tayne, a financial debt resolution attorney in Melville, N.Y. and author of “Life and Debt: A Fresh Approach to Achieving Financial Wellness.”

“First and most importantly, you need to ask yourself what your ultimate goal is regarding trying to get out of debt, reduce your payments and/or turn multiple payments into one,” Tayne said. “If you now need to use credit cards to pay for things in your budget, such as groceries, a consolidation loan may not be suitable for you since you’re not resolving the underlying issues related to your finances.”


  • Potential for lower interest rate. You could potentially get a lower interest rate than what you’re paying on your credit cards, meaning you’ll pay less over time.
  • Potential for lower monthly payment. Your monthly payment may be lower because a consolidation loan typically extends over a few years.
  • You’ll only paying one bill. You will be simplifying your bill paying versus having to manage multiple bills.
  • You’ll have a fixed interest rate. A fixed interest rate will remain the same for the entire length of your loan. This is beneficial because you won’t have to worry about rate hikes like with a credit card, Tayne said.
  • Your debt will be paid off at end of term. This is the ultimate reward of debt consolidation, assuming you don’t take on other debt while repaying your consolidation loan.


  • You’re not immediately getting rid of debt. It’s important to consider whether you’ll be able to afford the consolidation loan without using credit cards to supplement your other expenses as a result, so that you’re not just adding to your debt, Tayne said.
  • You’re not guaranteed a lower interest rate. Your interest rate could actually end up being higher than what you’ve been paying on your credit cards, particularly if your debt has negatively impacted your credit score.
  • Your credit score could drop. Taking out a consolidation loan is taking on another form of debt, which is not favorable to your credit score.
  • You may be charged a fee. Consolidation loans sometimes come with an origination fee, which is usually between 1-6% of your loan.

“Debt consolidation is only the right move if you’ve calculated that it will for sure cost you less than your current debt repayment method,” Tayne said. “In many cases, debt consolidation seems as though it will save you money, but when you actually crunch the numbers, you could end up paying more. You may not see the costs, and it may say no fees upfront, but that doesn’t mean the loan or balance transfer is without a cost.”

Your debt consolidation options

Here’s a look at various ways you can consolidate your debt, from personal loans to a debt relief company.

Personal loan

How does it work?Who’s it good for?
A personal loan provides a lump-sum payment, which you’ll repay in installments with interest.People with strong credit who have multiple types of debt that can’t be resolved with a balance transfer. Also, those who want the flexibility to set their own repayment term.

A personal loan is generally an unsecured loan, meaning it does not require you to put up collateral. It can be used for various purposes, including paying for a wedding, medical bills and, of course, for consolidating other debts.

What we like about this option: A personal loan can offer a lower, fixed rate than your outstanding debts. If you have stellar credit, your rate could be in the single digits.

By consolidating with a personal loan, you also get the flexibility to choose your repayment term with a lender you trust. You can choose a longer repayment term if you want lower monthly payments to free up cash, or shorten it if you want to pay down your debt aggressively.

What we don’t like about this option: You can’t use a personal loan to consolidate all types of debt. For example, you generally aren’t allowed to pool in student loan debt with other types of debt. Additionally, if you’re not careful and disciplined about not using your original lines of credit, you could end up in even deeper debt that you originally had.

Personal loans may be best for those with great credit. A low credit score could land you a high double-digit or triple-digit rate.

Balance transfer credit card

How does it work?Who’s it good for?
Allows you to transfer your credit card debt onto a new card, usually with a 0% introductory APR.Those with good credit and in a position to pay off the debt within the promotional period.

A balance transfer credit card is pretty much exactly what it sounds like — it’s a credit card for transferring the balances of other credit cards with higher interest rates. Transferring your balances will come with a balance transfer fee.

What we like about this option: The main appeal of balance transfer credit cards is that they often come with a 0% rate for a limited time. If you’re able to pay off your balance within that promotional period, you could save money by avoiding interest charges you otherwise would have accumulated on your credit card debt.

What we don’t like about this option: Balance transfer credit cards often come with a one-time balance transfer fee. However, this is typically only 3% of the amount of the transfer, which can be negligible compared with what you’ll save in interest if you pay off the card in a timely manner.

If you’re not disciplined enough to pay off your debt quickly, or you return to old habits and go back to using your original cards, you could find yourself in worse debt than you started off with.

Home equity loan

How does it work?Who’s it good for?
Converts your home’s equity into cash you can use to pay high debt balances, such as student loans or medical bills.Individuals with small amounts of high-interest debt, equity in their home and who are comfortable with a secured loan.

A home equity loan is a way for homeowners to access their home’s equity through a lump sum of cash, which is then repaid with monthly payments. This type of loan can be used to pay off various types of debt, including medical expenses, student loans and credit card debt. A home equity loan typically comes with a fixed interest rate and is fully amortized.

What we like about this option: Advantages of taking on a home equity loan include interest rates that are often lower than that of personal loans, and there are fewer limits as to what kind of debts can be tackled with them.

What we don’t like about this option: Secured loans come with an inherent risk: Losing the asset you used as collateral. In this case, if you fall behind on payments, your home could be foreclosed on.

Don’t want to consolidate your debt? Consider these repayment options

Debt consolidation methods like personal loans and balance transfer cards aren’t the best options for everyone, particularly if you have low credit. The following options can work for many people and don’t necessarily require an application process.

  • Debt snowball: This debt repayment method entails paying off your debts piecemeal, from the smallest to largest while also still making the minimum payments on the others. This method can be beneficial for those who are disciplined enough to stay on track with the plan, though it can cost you more if your larger debts have increasing interest rates.
  • Debt avalanche: With this method, you’ll start by paying off your debts with the highest interest rates first while making the minimum payments on your remaining debts at the same time. Whatever you have left over would go toward your debt with the highest interest. This method can be advantageous for people with higher or additional incomes, or who are motivated by numbers, which would enable them to pay the debt off quickly.
  • Part-time job or side hustle: If you take on a side gig like driving for Uber or picking up jobs on TaskRabbit, you can accumulate some fast cash to put toward your debt. An added bonus may be working on something you actually enjoy, like freelance writing or walking dogs.

Whatever method you choose to tackle your debt ultimately depends on your habits and individual situation. At the end of the day, it’s important to understand what works for some people might not be the best solution for you.

“Debt happens and is a part of life — it’s not something to be ashamed of, and at times consolidation does make sense, but you need to know the type of consolidation that makes sense for you and your personal finances,” Tayne said. “Taking charge of the situation and making sound financial decisions is what will ultimately get you out of debt.”

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