Pros and Cons of Debt Consolidation

Rocks balancing on the beach

Consolidating your debt to reduce your payments and interest may seem like a good idea, but there are downsides as well. Debt consolidation may not be the right option for you. It all depends your circumstances and your financial goals.

To determine if debt consolidation is the right choice for you, review the pros and cons before deciding.

The Pros

You may end up with a lower interest rate

With a debt management plan, depending on what accounts you’re including, your interest rates will likely be negotiated to a lower rate. And with a debt consolidation loan, presuming you have a strong credit rating, chances are good that your interest rate will be much lower than what you’re currently paying on your credit cards. This will save you money every month as well as a significant amount of money in the long-term.

You may be able to pay your debt off sooner

If your consolidation includes a reduced interest rate, more of your payment will likely be applied to your principal balance, allowing you to make a dent in your debt faster. What would have taken several years or more to pay off can be paid off within a couple of years.

You’ll only need to make one payment

Whether you choose a debt management plan or an unsecured loan, you’ll only need to make one payment each month instead of several. This means you only need to budget for your one monthly payment and you know it will always be the same amount. This can help simplify debt repayment and reduce the chances of forgetting to make a payment on one of your accounts.

The Cons

You only have one payment – and you need to make sure you don’t miss that payment

No matter what method of consolidation you use, you need to make sure you can manage your payments each month. Missing payments can hurt your credit, and if you miss multiple payments on a debt management plan you run the risk of losing your creditor concessions (including your reduced interest rate) and having your plan cancelled. If you’ve used your home as collateral to consolidate your debts, you may be putting your house at risk by failing to make payments.

If you start using your credit before paying off your debt consolidation, you could be worse off

If you consolidate with an unsecured loan, paying off all of your credit card balances, this zeros out your balances and allows you to start charging again. This can lead you down a worse road then where you started if you use those cards. You’ll not only have your debt consolidation payment to make, but also new credit card debt.

Debt consolidation rarely addresses the reason you struggled with debt in the first place

Finally, it’s important to keep in mind that debt consolidation can be a helpful tool, but it’s not a magic wand. If your issues with debt stem from a compulsion to overspend, or if your income simply doesn’t support your lifestyle, debt consolidation may buy you time and breathing room, but it won’t solve your fundamental issues.

Consider all your options before deciding to choose debt consolidation and make sure it’s the right path for you. Know what your responsibilities will be and know the consequences may be for missing payments or making new charges.

Emilie writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. You can find more of her work at