pros and cons of debt consolidation

Pros and Cons of Debt Consolidation

Juggling different sources of debt can feel like putting out a house fire with a garden hose. You may make improvements in one area, only to realize you’ve let another area get out of control. That’s why debt consolidation exists – to give consumers the option of combining all those debt sources into one.

When you work with a debt consolidation company, they’re essentially buying up your old loans and issuing you a new, equivalent loan. While that’s a fantastic idea for some, it’s not a great option for everybody.

Depending on your specific financial circumstances, consolidating your debt could either simplify your repayment path or introduce a number of unwanted issues. Read on to find out whether or not it’s right for you.

Pros of Debt Consolidation

Simplifying your payments

When you consolidate your loans, you convert them into one chunk of debt. Now, instead of making multiple payments each month, you only have one bill to worry about. That makes it easier to track your debt and make your payment on time.

Missing a payment or making late payments can drag down your credit score and make it harder to qualify for credit, so finding simpler approach is always beneficial.

Lower interest rate

Most of the time, people consolidate their loans in order to get a lower interest rate. That lower rate can save consumers thousands of dollars in total and speed up the repayment process. This is especially true if they continue to make the same payments, since more money will go toward the principal.

If you have credit card debt that you transfer onto a card with 0% APR, you could avoid paying interest entirely if you wipe out the balance before the 0% promotion ends.

You can deduct the interest

If you use a home equity loan as a consolidation loan, you’ll be able to deduct any interest you pay on your taxes. Not only will you likely have a lower interest rate, but you’ll be decreasing your taxable income. Talk to a tax expert if you’re unsure whether or not you qualify for the deduction.

Cons of debt consolidation

Fewer milestones to celebrate

When you have multiple loans, you can pay them off individually, celebrating the end of each one separately. However, it takes longer to pay off a consolidated loan, since it’s the product of many loans merged together. That can make it harder to stay motivated to pay off your debt early.

If you’re the type of person who gets overwhelmed quickly, it might be better to keep your loans detached so you can focus on them one-by-one. Debt repayment is as much mental as it is financial, so don’t discount how this will affect you.

Can lose special protections

Some loans, such as federal student loans, have special protections and benefits that other loans don’t have, such as deferment, forbearance, and income-repayment options. When you consolidate, you forfeit those perks forever.

That’s not a problem if you’re capable of easily making all your payments, but if you lose your job and are struggling to make ends meet, having the ability to defer your loans could be the difference between losing your apartment or staying afloat.

Before you consolidate, make sure you’re comfortable giving up those protections in favor of a lower interest rate.

It doesn’t always fix the problem

Debt consolidation is popular with people struggling to make their payments. It can seem like an easy solution to a complicated and frustrating problem, but, unless you have a clear road to debt freedom, consolidation could be nothing more than a temporary stopgap.

For example, if you have $15,000 in credit card debt and use a debt consolidation loan to pay it off, you suddenly have $15,000 of credit available. Unless you close the account or cut up the credit cards, you might be tempted to access that credit. This could lead to you racking up another credit card balance on top of your existing consolidation loan.

You could pay more in interest

Sometimes, a consolidation loan will have a longer term than your previous loans. This could result in you paying more interest overall, even if the interest rate is lower than it was on your previous loans. Before signing up for a consolidation loan, look at the total interest fees and compare them to your current ones.

A home loan consolidation could put your home at risk

Many people use a home equity loan to consolidate their debt. The problem is that, when you put your house up as collateral, you risk losing your home. If you’re having trouble making payments, it’s not worth getting a lower interest rate if you’re also risking your family’s home in the process.

Pros and Cons of Debt Consolidation: The Bottom Line


Compare the pros and cons to make a better decision.

  • Simplifies your payments
  • Lower interest rate
  • You can deduct the interest
  • Less milestones
  • Can lose special protections
  • It doesn’t always fix the problem
  • You could pay more in interest
  • A home loan consolidation could put your home at risk

Still not sure if you want to consolidate your debt? Check to see what kind of consolidation loans you qualify for. If you find one with a low interest rate and good terms, then it might be worth consolidating your debt. You can get pre-approved through SuperMoney, which will list the types of loans, interest rates, term lengths and more. Find the best loan available for you so you can finally tackle your debt.