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. Make sure you really are getting a better rate than what you already have by using our calculator to determine the weighted average interest rate across all your creditor accounts.

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.

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