Is Debt Consolidation a Good Idea?

One method for paying down debt is debt consolidation — taking out a loan to cover all your debt and then repaying the loan. If this strategy suits your circumstances, you can streamline your repayment process and pay down your debt more quickly, resulting in lower interest fees overall.

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  • Updated: May 19, 2023
  • 6 min read time
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Who Typically Consolidates Their Debt?

Debt consolidation is most effective for unsecured debt like credit card debt, medical debt or student loan debt. Unsecured debt comes with higher interest rates than secured debts such as mortgages or car loans. According to the Federal Reserve Bank of New York, household debt grew by 2.4% in the last quarter of 2022. Credit card balances increased by $61 billion and student loan balances went up by $21 billion in that time frame. 

Single women tend to have higher total credit card debt than single men. Women carry two-thirds of student loan debt in the United States, and Black students carry more student debt than white students. White and Asian households carry more secured debt overall, while Black households carry more unsecured debt. With so much debt in so many places, it’s easy to see how debt consolidation appeals to people.

Common Reasons People Choose To Consolidate Their Debt

  • They have several high-interest debts or loans
  • Their income is sufficient to cover their current debt load
  • They have a decent credit score
  • They would like to organize and simplify their payment schedule

When considering any loan, whether it is secured like a mortgage or car loan, or unsecured like a personal loan, it is important to review not only the interest rate, but the Annual Percentage Rate (APR). The interest rate of a loan is the percentage of interest you will pay to borrow. The APR is a more comprehensive calculation that can be viewed as the total cost of borrowing.

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When Is Debt Consolidation a Smart Idea?

Debt consolidation helps when your unsecured debt is manageable, even if you find it unwieldy. In addition to streamlining your payment process, if you have a reasonable credit score, debt consolidation can lower the amount of your monthly payments, reduce your overall interest charges and help you pay off your debts more quickly.

Having to make only one payment every month makes your repayment process easier to manage and reduces your chances of missing a due date. A history of consistently on-time debt payments will improve your credit score. Finally, if your loan lets you increase your payment amount, you can pay off your debt more quickly. 

When It Isn’t for You

If you have only a small amount of debt — say a few credit card balances that you can pay off in less than six months — debt consolidation might not be your best choice. With that little debt, you have no need to lower your credit score by applying for an additional loan. 

Debt consolidation is also not the best strategy when your income is insufficient to cover your debt. If you already struggle to service your debt, taking out another loan is unlikely to help. Nor will it solve the underlying problem of your debt-to-income ratio. 

When you have poor credit or a history of missed payments, debt consolidation might not be your best first choice. Under those debt circumstances, you are unlikely to qualify for a lower-interest loan, which is one of the main benefits of consolidating your debt.

Risks To Be Aware of When Consolidating Debt

Debt consolidation may seem appealing: one payment per month instead of having to remember multiple due dates and amounts. But debt consolidation comes with costs and risks. 

While getting a consolidation loan and paying off your credit cards might make you feel like you now have more money to spend, it’s vital not to fall into that trap and accrue even more debt. If you keep building debt, you will be no better off than before — and you could end up in worse circumstances. 

Taking out a consolidation loan comes with additional fees. Loan origination fees (usually a percentage of the loan amount) and closing fees add to the amount you owe. Sometimes these fees are negotiable, but not always.

There’s another drawback to fees: they can be a red flag for scammers. Fraudulent debt relief companies promise to help you erase your debt for a steep upfront fee, then disappear with your money, leaving you still in debt and with less money.  

Credit Score Impacts

Taking out a personal loan to consolidate your debts can impact your credit score negatively at first. Applying for a loan, even a debt consolidation loan, can lower your credit rating. However, if you make all your loan payments on time, your credit rating will climb back within a year.

Paying More in Interest

Unsecured debt, such as credit card debt, often has interest rates of 18.99% or higher, while personal loans often have much lower interest rates. That’s one of the primary reasons to take out a debt consolidation loan, to take advantage of the potential to pay less interest. But if your credit score is poor, you may not end up with a lower interest rate.

Some debt consolidation loans offer lower interest rates temporarily: for instance, only for the first six months or first year of your new loan. In addition, because personal loan repayment terms often last several years, over time you may end up paying more in interest than you think. Understand all the terms and conditions of any debt consolidation loan you take out.

How To Prepare for Debt Consolidation

Debt consolidation can be a helpful strategy when you want to eliminate your debt. If you think it might work for you, here are some steps to follow.

Preparing Yourself for Debt Consolidation
Get a clear understanding of your current debt situation.
You need to know exactly how much you owe and to whom before you can apply for a consolidation loan. Your loan must cover all your outstanding debts.
Review your credit report.
The Fair Credit Reporting Act gives you the right to a free credit report every year from There are three credit reporting companies — Equifax, Experian and TransUnion — and you can receive and review reports from all three. 
Create a budget and financial plan.
Paying off your debt means reprogramming the spending patterns and habits that helped you accrue it. Creating a budget will help you understand where and how you overspent so you can change your behavior going forward. There’s no point in taking out a consolidation loan if you are going to fall right back into debt.
Shop around for the best debt consolidation option.
Many banks and credit unions offer personal loans with differing interest rates and payment terms. Ask your local financial institutions what special promotions or deals they have that would make a loan attractive.
Consider working with a credit counselor.
Credit counselors can help you with all the above steps and provide you with additional resources and information to improve your financial understanding and help you avoid debt problems going forward. Non-profit credit counseling agencies are available across the country. Your financial advisor also might be able to offer helpful advice.

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Last Modified: May 19, 2023

6 Cited Research Articles writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

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  2. Kent, A. and Addo, F. (2022, November 10). Gender and Racial Disparities in Student Loan Debt. Retrieved from
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  6. United States Census Bureau. (n.d.). Wealth, Asset Ownership, & Debt of Households Detailed Tables 2020. Retrieved from