What is Debt Consolidation? Is it Worth it?

Debt Consolidation

Debt consolidation rolls all your loans into a single, more manageable plan – but it’s not a silver bullet. Here’s what you need to know to see if consolidating your debts is a viable option.

If you’re overwhelmed with different types of debt, the idea of packaging all these loans together and making lower monthly payments may sound enticing. That’s what debt consolidation is. For some, consolidating your debts can lead to lower interest rates and fewer payments.

However, debt consolidation isn’t always the answer. For some, it ends up simply creating more indebtedness.

For those struggling with credit card debt, payday loans, student loans or other personal debts, we’ll provide a complete overview so that you can make the right decision on whether debt consolidation is right for you.

What is Debt Consolidation?

Debt consolidation is exactly what it sounds like, merging multiple debts into one. Instead of paying several different lenders, you pay a single lender, ideally with better terms.

In practice, you typically will take out a loan that has a lower interest rate than your outstanding loans. Then, you will use this cash to pay off your other loans, leaving you with a single lower-interest loan to pay. Remember, always pay off your highest interest loans first.

All sorts of debts can be consolidated, including credit card, medical, student, payday, auto, and personal debt.

It’s important to remember that debt consolidation will never wipe out your balance – you’re stuck with that unless you are able to negotiate forgiveness with your lenders. However, if you are able to get a lower interest rate on your new loan, you will save a boatload of money. There’s also a secondary benefit of only needing to make a single payment. This is easier to stay on top of and may result in fewer late fees if you struggle to stay on top of all your payments.

The Pros and Cons of Consolidating Your Debts

Before jumping to a conclusion and applying for loans, it’s important to consider the potential benefits and drawbacks of debt consolidation.


  1. You can manage your total debt load in one regular monthly payment
  2. You’re less likely to miss your monthly payment, which can result in late fees and a ding to your credit score
  3. You might be able to secure a lower interest rate
  4. You’ll have less paperwork
  5. You may save on loan fees and charges
  6. Potential for an improved credit score


  1. It may take you longer to pay off your debt
  2. You may not be able to qualify for a lower interest rate
  3. Upfront costs – it may cost money to take out your debt consolidation loan
  4. Potential higher cost of debt – if your new loan has a longer time period, you’ll pay more interest in the long run

How to Consolidate Your Debt

As previously mentioned, most options involve taking out a loan to pay off other loans. Here are some of the most common ‘do it yourself’ debt consolidation options.

Debt Consolidation Loan

A debt consolidation loan is the first and most obvious choice. It’s a loan designed specifically for the predicament that you are in. Typically you will need a credit score in the 600s to qualify, and can a loan up to $50,000. According to data from Bankrate, interest rates for consolidation loans start around 6%. Only use a debt consolidation loan if the interest rate you qualify for is lower than the interest rates of your current loans.

Balance Transfer Credit Card

Many credit cards offer an introductory balance transfer period, where you pay 0% interest for a few months. You can only transfer other credit card balances onto the card, so this may not help with other forms of debt. These introductory periods can last anywhere from 6-18 months.

Be sure to check your mail for these kinds of offers. Credit card companies are required by law to approve the majority of offers they make through the mail. So if you get an offer with an enticing balance transfer offer, you’re likely to get approved.

Zero percent APR balance transfer cards are ideal for those who can pay off their debt within the introductory period. Because once that intro period is up, you’ll be paying the full APR of the credit card. So be sure that either a) you can pay off the debt within the 0% APR balance transfer period or b) the post-teaser balance transfer rate is lower than the interest rate you’re currently paying.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit, or HELOC, is a loan that is secured by your home. You can draw your loan whenever you need it, and the amount you can draw is based on the equity you have in your home. Currently HELOC annual percentage interest rates are in the 3.5% range, making them one of the cheapest ways to consolidate your loans out there. Additionally, the loan terms are extremely long – 10-20 years – giving you plenty of time to repay your debt.

Of course, this is only an option if you own a home and have equity in it. Additionally, you are putting your home up as collateral, so you could potentially lose your home if you fail to repay the loan.

What about Debt Consolidation Programs / Debt Settlement Companies?

If you’ve been researching debt consolidation, you’ve likely come across companies that offer debt consolidation as a service. And they are probably enticing.

However, you must approach these cautiously.

These companies essentially take over payments to your lenders, and require you to make payments to a separate bank account in your name. These companies typically bank on being able to negotiate down your debts with your lenders, and take fees and a % of the money saved.

It’s a business that works in theory, but in practice can be shady. Additionally, because some will stop paying your bills as a negotiating tactic, you may have your credit score hurt.

So, use these as your last resort. Additionally, be sure the firm is licensed with the state and is in good standing with the Better Business Bureau.

When is Debt Consolidation a Good Idea?

 For some, consolidating debts can be life-changing, while for others it simply isn’t practical. Here are some general guidelines to help determine if it’s a good idea for you.

Debt consolidation is a good idea if:

  • You are overwhelmed by multiple monthly bills and can’t reliably pay them off
  • You have taken inventory of all your existing debt
  • Your total debt isn’t more than 40% of your gross income
  • Your credit score is high enough to secure a low to 0% interest debt consolidation loan
  • You have done all your research and understand what you’re getting into

Debt consolidation is not a good idea if:

  • Your credit rating is too low for you to secure a low interest loan
  • You are consolidating unsecured loans with a secured loan
  • You are spending more than you earn or if you still haven’t solved your spending problems
  • Your debt load is too small that applying for debt consolidation doesn’t make sense

Debt Consolidation by State