Debt Consolidation Loan Pros and Cons

On average, Americans have more than $90,000 in personal debt across all kinds of accounts — credit cards, mortgage loans, personal loans, student loans, vehicles and more. Almost needless to say, keeping all these different accounts up to date can be challenging logistically — not to mention expensive, as various accounts accumulate various interest charges.

This makes a debt consolidation loan a tempting choice, as this solution is geared at minimizing how many bills you have to pay each month and reducing the amount of interest you end up paying over time. Every debt elimination strategy has its upsides and downsides, and consolidation is certainly no exception.

Here are the main debt consolidation loan pros and cons to keep in mind as you learn more about this approach.

Pro: You Could Save Money

Many people are motivated to explore consolidation because it could save them money. Borrowers with strong credit who qualify for a relatively low-interest consolidation loan can use it to pay off debts with higher interests, such as credit cards. For instance, if you can qualify for a personal loan at 8 percent APR and use it to wipe out credit cards ranging from 18 to 22 percent APR, you’ll likely save money — although you should always calculate it out to make sure, factoring in fees and other considerations.

Pro: Paying Bills Becomes Easier

Would you rather pay one fixed loan payment each month or five revolving credit card accounts? This sounds like a trick question because the answer is so obvious. A major perk of consolidating debts via a loan is only having to make that one loan payment each month. Since it’s the same amount month in and month out, it makes it easier to budget for this expense, too.

Pro: You Could Pay Off Your Debts Faster

Ever feel like you’re shoveling money at your credit card debts yet barely making a dent? This cycle of revolving debt can feel like walking up an escalator that’s going down — you end up staying in place despite exerting energy.

Debt consolidation loans offer a firm pay-off date and the fixed monthly payments required to get there. This makes it simpler to track progress and, again, include this expense in your household budget.

Pro: Making Payments Can Help Build Your Credit

Making timely, routine payments on a loan over time makes you appear more responsible in the eyes of lenders, which can boost your score. Here’s a pro tip from Money Crashers: Keep your credit card accounts open even after you’ve paid off the balances to avoid making your credit utilization rate skyrocket, something that can damage your score.

Con: You May Not Save Money

As we mentioned above, lenders look at your credit history, income and other factors when setting your loan APR. There’s no guarantee you’ll qualify for a low enough rate to actually save money. What you can do is plug in your loan amount, loan term, interest rate, etc. into a consolidation calculator to figure out whether you will be saving money and how much.

Con: Secured Loans Put Your Assets at Risk

One way to get lower interest rates is to secure an asset against the loan. Be aware if you end up missing payments or defaulting, the lender can seize whatever asset you’ve attached as collateral.

Con: You May Be Tempted to Take on More Debt

One major temptation following paying off credit cards — loan or no loan — is running up the balances again. Avoiding this temptation means committing to your budget and keeping spending in check for the duration of loan repayment.

Weighing the pros of using a debt consolidation loan against the cons will help you make the savviest decision for your needs and help you avoid nasty surprises along the way.