What are the pros and cons of debt consolidation?

The biggest pros of debt consolidation include the potential to save a lot of money and the simplicity of having fewer monthly payments to deal with. Notable cons include short-term credit score damage, the possibility of fees, and the risk of actually adding to your debt load in the long run. Plus, it’s difficult to get a good deal on debt consolidation without a credit score of 660-700 or higher.

So, the practice of debt consolidation does indeed have both pros and cons. But the pros usually outweigh the cons, especially for people who do their research and borrow responsibly.

Top 4 Pros and Cons of Debt Consolidation

Pros of Debt Consolidation:

1. Lower APR possible. When you consolidate, you may be able to get a lower APR than the ones on your original debts, which can save you money and help you pay off the total amount more quickly.
2. One monthly payment. You will go from having multiple monthly payments to keep track of to having just one.
3. Lower likelihood of default and credit score damage. Accruing interest less quickly and only having to submit one payment help reduce the odds that you will miss payments or default. Thus, you can avoid credit score damage.
4. More time for repayment. Depending on the type of debts you consolidate, you might get a longer payoff period. For example, if you consolidate payday loans, you’ll go from owing the money in 2 - 4 weeks to having months or years to pay it off – and at much lower rates, too.
5. Could free up collateral. If you consolidate with an unsecured loan or use a credit card balance transfer to pay off a loan that’s currently secured by collateral, you will no longer be in danger of losing that collateral.

Cons of Debt Consolidation:

1. Credit score restrictions. In order to qualify for a personal loan, you’ll need a credit score of 585+. You’ll need 620+ for a home equity loan or HELOC and 700+ for a good balance transfer credit card. And those are the bare minimums – you’ll need good or excellent credit for the best APRs.
2. Lower APRs aren’t always available. Not everyone can qualify for a lower APR than they currently have, especially if their credit rating has declined since they took out the original debt.
3. Not all debts are eligible. Not all debt consolidation options support all types of debt. For example, credit card issuers often limit the types of debt that can be moved to a credit card through a balance transfer.
4. Hard inquiries hurt your credit standing. If you open a new loan or credit card, the hard inquiry triggered by the application will cause some temporary credit score damage. It’ll take a few months of timely payments to bounce back.
5. Fees could add to your costs. You may need to pay a fee in order to consolidate debt. For example, personal loans sometimes charge origination fees of 1% to 8% of the loan amount, and credit cards often charge balance transfer fees of 3% to 5% of the transferred amount.
6. Consolidation might not solve your problem: If you don’t pay the bills on schedule and adjust your everyday spending to ensure it’s sustainable, consolidation won’t pay off in the long run. That’s especially true given that it might be possible to borrow more than the amount being consolidated. Your highest priority should be getting debt-free, so you don’t need to keep refinancing over and over.

There are plenty of ways to consolidate debt, each of which has its own pros and cons. You can consolidate by getting a lump sum through a personal loan or home equity loan. Or, you can borrow up to a certain limit any time you want by taking out a home equity line of credit or doing a balance transfer to a credit card.

Advantages & Disadvantages of Popular Debt Consolidation Options:

Personal loans allow you to borrow a lump sum for 12 - 84 months without putting down any collateral. Their funds can be used for anything, including paying off old debts.

Benefits of consolidating debt with a personal loan include quick funding and not having to put down collateral (usually).

Drawbacks include APRs as high as 36% and origination fees in some cases.

Home equity loans allow you to borrow a portion of the value of your house minus what’s still due on the mortgage. You can use the money for anything.

Benefits of consolidating debt with a home equity loan include potentially large amounts of funding and low APRs.

Drawbacks include using your house as collateral and sometimes having to wait over a month for funding.

Home equity lines of credit (HELOCs) allow you to borrow money multiple times up to a certain credit limit, based on your home’s value. Like home equity loans, you can use them to pay off debts.

Benefits of consolidating debt with a HELOC include potentially large amounts of funding, low APRs, and the ability to borrow multiple times.

Drawbacks include using your house as collateral and sometimes having to wait over a month for funding.

Balance transfer credit cards allow you to pay off multiple lenders with the card’s credit line, thereby moving the balances so that payments are due to the card’s issuer.

Benefits of consolidating debt with a balance transfer credit card include potential 0% APRs for 6 - 24 months and instant funding once you have the card.

Drawbacks include high regular APRs and often low credit limits.