Pros and Cons of Consolidating Debt with an Unsecured Loan

Thinking of consolidating your debt with an unsecured consolidation loan? Here are a few things to keep in mind as you weigh your options:

Pros

Fewer monthly payments

By combining multiple debts into one consolidation loan, you’ll have fewer debts and debt payments to manage each month.

Fixed end date

If you’re only paying the minimum due on a large credit card debt, you could literally be paying for decades. Most loans usually have a clearly defined payment schedule, which spells out what you’ll pay, when it’s due, how much will go toward the principle, and when you’ll have the whole thing paid off.

Lower interest rate

Interest rates on loans, credit cards, and other financial products will vary depending on a lot of factors, but on the average, the rates for personal loans are around 50 percent lower than the rates for credit cards. That can make a difference in savings over the life of the debt.

Cons

Best credit gets the best terms

If you’ve already missed a few payments and your credit score has suffered as a result, you may find it hard to qualify for loans with low interest rates and other helpful terms.

Having fewer open accounts may ding your credit

One factor in most credit scoring models is your length of credit history. When you close multiple old accounts in favor of one new account, that could potentially lower your score. That’s only if your lender requires you to close your old accounts, which isn’t a guarantee.

Less flexibility

With a debt consolidation loan you’ll have fewer payments to manage, but that one new payment will likely be bigger than any one payment you had before. As a result, you may lose a little flexibility should funds become tight one month and you have to decide which bills to pay and which to skip.

Upfront fees

Most loans include a variety of fees. Keep in mind the costs of taking out a loan in the first place.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.