Is debt consolidation a good idea?
By Rebecca Lake
Reviewed by Keith Osmun
Jul 16, 2023
Read time: 7 min
Debt consolidation could help you streamline debt payments and pay off what you owe faster than by making minimum payments.
Consolidating debt could save you money on interest if you get a lower rate.
If a debt consolidation loan isn't right for your situation, there are several alternatives to help you get rid of debt.
Ready to get unwieldy debt under control? Consolidating high-interest credit cards and other debts could make repayment less of a headache. Debt consolidation usually involves getting one new loan to pay off multiple smaller debts. Doing this combines those bills into one fixed monthly payment. That could make it easier to pay your bills each month. You might save money on interest, too.
Is debt consolidation a good idea? Here's what you need to know.
What is debt consolidation?
Consolidating means combining a number of things into a single thing. Debt consolidation does this with…you guessed it, debts! It usually means taking out a loan to pay off multiple smaller debts.
Most of the time, consolidation loans are used to pay off unsecured debts. For example, you might consider debt consolidation if you owe:
Credit card balances
If you owe federal student loans, you can consolidate them through the Department of Education. Private student loan debt can be refinanced through a private lender.
You could use a debt consolidation loan to pay off a secured debt, but it’s less common. Secured loans tend to cost less than unsecured loans. “Secured” means it’s guaranteed by something of value. If you don’t repay the loan, the lender can sell the thing to get paid what you owe. Car loans are a good example of a secured loan.
How does debt consolidation work?
Debt consolidation works by giving you a loan that you can use to pay off other debts.
Most of the time, you’d use a personal loan or you’d borrow against your home equity using a home equity loan or home equity line of credit (HELOC). You could also use a 0% APR balance transfer credit card to combine credit card debts.
Here's a quick overview of what those options are and how they compare.
Personal loans give you a lump sum of money that you could use to pay off other debts. Most personal loans are unsecured and have a fixed interest rate. You don’t have to own anything valuable that you can borrow against (“collateral”) and the interest rate won’t change for the life of the loan.
You could borrow anywhere from $5,000 to $50,000 with a personal loan for debt consolidation. How much you qualify for depends on your income, your other financial obligations, and your credit profile. Typical repayment terms are 24 to 60 months.
Home equity loans
A home equity loan lets you borrow against your equity and get a lump sum of cash to consolidate debts. Equity is your home’s current market value minus the amount you still owe on the mortgage. If you own a $500,000 home and you still have a $150,000 balance on your mortgage, you have $350,000 in equity.
Since you're borrowing against your equity, you are pledging your home as a guarantee that you’ll repay the loan. If you don’t, you could lose your home.
Most home equity loans have a fixed interest rate. Your interest rate won’t change for the life of the loan, and your payment amount will be the same until the loan is paid off.
Home equity loans tend to have higher loan limits than personal loans. Your limit will depend on which lender you choose, how much equity you have, and your credit profile. Repayment terms usually last from 10 to 30 years. The longer you take to repay the loan, the more interest you'll pay over time.
Home equity line of credit (HELOC)
A HELOC has an advantage over a home equity loan in that you get access to a revolving credit line for a few years. During that time (called the “draw period”), you can borrow, repay, and borrow more as often as you like, up to your credit limit, and use the money to pay off debts or for some other purpose. Again, since you're borrowing against your equity, your home is collateral.
HELOC amounts can be similar to what you could borrow with a home equity loan. The repayment period is typically 10 to 15 years.
You’d want to look for a fixed-rate HELOC. Most HELOCs have a variable interest rate, which means it can fluctuate while you’re paying it off. A fixed-rate HELOC lets you lock in your interest rate at the beginning. This protects you against the chance of interest rates rising in the future and lets you have predictable payments for the life of the loan.
Balance transfers let you move credit card balances from one card to another, ideally at a lower APR. There's no collateral required for a credit card balance transfer.
Interest rates can vary, but it's possible to find 0% APR balance transfer offers. The introductory rate is only good for a set time frame, usually from 6 to 21 months. After that, the regular variable APR (usually a lot higher) kicks in.
Approach balance transfers with caution. If you juggle balances back and forth between low-interest offers, you could fall into a debt trap and end up with even more credit card debt than you started with. Also, balance transfers almost always incur a fee, which cuts into your savings. Think of a balance transfer as a one-time strategy that’s part of a larger plan to reduce your debt.
Does debt consolidation let you pay back what you owe interest-free?
Usually, no. Lenders charge interest on most types of loans. The one possible exception is the balance transfer. You might be able to get 0% interest for a set time frame. But you’ll probably pay a balance transfer fee. Then, you’ll start paying interest if your balance isn’t paid off by the time the 0% period ends.
When debt consolidation is a smart move
Debt consolidation is designed to make it easier to pay back what you owe. It works best when you can get a lower interest rate on the new loan. It doesn’t make sense to pay off your debts with a loan that has a higher interest rate.
If you're trying to pay down five or six credit cards, it can take a lot of work and a long time to make a dent, especially if you only make the minimum payments. High interest rates can make chipping away at credit card balances an uphill climb.
Consolidating debt could make those payments easier to manage. Depending on the new APR you're paying on the loan, you might save money on interest, too.
Here are some examples of when debt consolidation might be a good option to consider:
You owe $10,000 in credit card debt, which will take seven years to pay off at your current APR. You could get approved for a personal loan with an interest rate that's half what you're paying now, allowing you to get rid of your credit card debt faster.
An unexpected illness leaves you with $25,000 in medical bills on top of the $15,000 you owe in credit card bills. The hospital doesn't offer a payment plan, so you get a home equity loan to pay off your medical debt and credit cards.
You're making payments to four different credit cards, and even though the balances are less than $10,000, it doesn't seem like you're getting anywhere. You could open a 0% APR balance transfer credit card to pay them off and make some headway against the balance before the regular interest rate kicks in.
When debt consolidation isn’t an option
Not everyone will qualify for a new loan or credit card. In some cases, it might make sense to consider an alternative to a debt consolidation loan.
For example, if you've fallen behind on credit card payments or something in your financial situation has changed and you can’t afford to repay your debts, you could look into debt resolution. Resolving debts means negotiating with your creditors to accept less than what you owe. If that sounds like something you might be interested in, talk to a debt consultant to learn more about how it works.
Pros of debt consolidation
Debt consolidation can offer some advantages:
Simplify multiple debts and payment dates with one fixed monthly payment
Free up cash flow if you get a lower payment.
Pay less interest each month if you get a lower interest rate.
Pay off your debts faster than by making minimum payments.
Save money on total interest charges if you pay off your debt in less time.
Debt consolidation could make budgeting easier.
Making on-time payments on a debt consolidation loan could have a positive impact on your credit profile.
Funding can be quick depending on where you're getting a debt consolidation loan, which is another plus. Through Achieve, you might get a same-day approval decision and funding in as little as 24 to 72 hours.
Potential drawbacks of debt consolidation
Is debt consolidation a perfect solution? It could be for some people, but there are some potential downsides to be aware of.
Consolidation isn't a cure for the financial issues that might have landed you in debt in the first place. You’re moving your debt, not eliminating it.
You'll still pay interest and sometimes fees to consolidate debt with a personal loan or home equity loan.
Missing payments on a debt consolidation loan could lead to late fees or a negative impact on your credit.
Another thing to remember is that debt consolidation rates aren't always lower. Your rate will depend on the specifics in your application.
Debt consolidation could help you get a handle on your finances. Dig into details if you're considering a personal or home equity loan to consolidate debts. Look at how much you can borrow, how much you’ll have to pay in interest, and the repayment options. Then get a quote online to learn what terms you'll qualify for.
Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.
Keith is an editor and fact-checker for Achieve. He makes sure the content is accessible by ensuring that each piece has impeccable grammar, an approachable tone, and accurate details.
Frequently asked questions
Do debt consolidation loans hurt your credit?
Applying for a debt consolidation loan creates a hard inquiry on your credit report. Hard inquiries can have a small, temporary negative impact on your credit.
Closing credit card accounts after you pay them off with a loan can sometimes have a negative effect on your credit profile, depending on whether you still have balances on other credit card accounts.
A debt consolidation loan could have a positive impact on your credit if you make your payments on time.
When is debt consolidation not a good option?
Debt consolidation isn't a good idea if there’s a risk of running the paid-off credit card accounts back up again. In that case, you'll end up with even more debt. You can avoid this risk by closing the accounts after you use the loan to pay them off.
How long does debt consolidation stay on your credit report?
Loans stay on your credit report for the entire time you’re paying them off. Credit cards stay on your credit report as long as they are open and in good standing.
Accounts closed in good standing (including any loans or credit cards that you pay off with the consolidation loan) stay on your credit report and have a positive impact for ten more years.
Late payments and collection accounts stay on your credit report for seven years past the date the account was first reported as delinquent.