Thinking of consolidating your debt? Here are the pros and cons you need to know (2024)

It can be easy to fall into debt, especially if you tend to overspend or you have no choice but to pay for necessities with a credit card. But getting out of debt is often much harder when interest rates are astronomical and monthly payments are so high you don't have room to throw anything extra at them.

If you feel like you're stuck in a no-win situation with multiple debts hanging over your head that you can't afford to pay off, a personal loan for debt consolidation might be a useful tool to help you finally start making some significant progress.

Getting a debt consolidation loan means you apply for a specific amount of money, usually enough to cover the exact amount of total debt you're trying to pay off. Once approved, lenders will typically pay your creditors directly, asking for their information and the amount you wish to send to each. Alternatively, the funds could simply be deposited into your bank account —they would have to be used to pay off your debts and once that was done, you'd just need to pay back your debt consolidation loan with fixed, equal monthly payments over a specified timeline.

Like any loan, you'll be charged interest, but unlike credit card interest — which averages about 16.44% according to theFed'smost recent data — an APR for a personal loan currently averages around 9.09%. Typically, your interest payments are calculated into your monthly payment and divided over the lifetime of the loan, with most loan terms ranging anywhere from six months to seven years. The longer the term, the lower your monthly payment will be, although you'll be charged more interest over time so it's recommended to elect for the shortest-term loan you can afford.

Some lenders also charge a sign-up or origination fee, however there are several no-fee options with varying interest rates available depending on your credit score. Choose a personal loan that doesn't carry too many fees whenever possible and always make sure you're comfortable with the terms and features of the loan before you accept it.

Alternatively, you might consider choosing a 0% APR balance transfer credit card to consolidate debts you carry on multiple credit cards. So let's say you apply for a credit card like theCiti Simplicity® Cardor theU.S. Bank Visa® Platinum Card: you'll be able to transfer the balance of existing credit cards to the new card and pay off as much as you can with an introductory 0% interest offer. The 0% intro APR for the Citi Simplicity Card lasts for 21 months from date of first transfer (after, 19.24% - 29.99% variable; transfers must be completed in the first 4 months) and the interest-free period for the Visa Platinum Card lasts for the first 18 billing cycles (after, 18.74% - 29.74% variable).

Just keep in mind that you'll have to pay a balance transfer fee, which will vary depending on the credit card you choose. Still, if you have a high amount of debt paying the balance transfer fee can be worth it, as you won't have any interest compounding.

You might receive a lower interest rate

One major draw to consolidating your debt is the potential to receive a lower interest rate, which can save you hundreds or even thousands of dollars in the long run.

Bankrate's website has an online interest calculator you can use to figure out how much you'd have to pay in interest over the life of a loan —or until you pay off your debt. For instance, let's say you have a total debt balance of $25,000 with a combined interest rate of 7.5%. In this case, you can expect to pay $6,799.84 in total interest over the life of the loan. Now, let's say you've consolidated those debts and are currently paying an interest rate of 6%. In this case, you'd only have to pay $5,050.46 in interest over the life of the loan, meaning you'd be saving $1,749.38 in interest payments.

Keep in mind that while the new interest rate you receive may not always be drastically lower than your current rate, some savings are still better than none at all.

A 0% APR balance transfer credit card can allow you to make monthly payments without accruing interest for a limited amount of time (a.k.a., the introductory period). The Citi Double Cash® Card allows you to make a balance transfer and make monthly payments at a introductory 0% APR for the first 18 months (19.24% - 29.24% APR variable thereafter).

But if you need a credit card with a longer 0% intro APR period, the Citi® Diamond Preferred® Card offers an introductory interest-free period for 21 months for balance transfers from date of first transfer (see rates and fees). After that, the variable APR will be 18.24% - 28.99% variable; there is a balance transfer fee of $5 or 5% of the amount of the transfer, whichever is greater. Balance transfers for both cards must be completed within 4 months of account opening.

You might feel like you're able to repay your debt faster

Another side effect of having a lower interest rate for your debt is the ability to repay your balance a little faster. Having high interest rates often leaves borrowers feeling as though the majority of their monthly payment goes toward the interest rather than the principal, while having a lower interest rate may actually allow you to put some extra cash toward the principal. Even if you're able to put just an extra $50 toward your monthly payments, doing so can make a positive difference in the amount of time it takes for you to pay off the debt completely.

If this is your goal with debt consolidation, apply for a personal loan that doesn't charge prepayment penalties, extra fees charged for paying off your loan earlier than you were supposed to. While the actual cost of a prepayment penalty varies depending on how it's being charged, these can appear as a percentage of your loan balance, as the amount of interest your lender is missing out on since you paid it off early or as an additional fixed fee.

Read the terms of the loan to figure out if there's a prepayment penalty. Some lenders, like LightStream and Discover Personal Loans, do not charge prepayment penalties, letting consumers apply for up to $100,000 and $35,000, respectively. Happy Money, a lender offering personal loans meant exclusively for debt consolidation, also doesn't charge a prepayment penalty, and has loan amounts ranging from $5,000 to $40,000.

Your monthly payments will be simplified

Not only can debt consolidation help you save money, it can also help you feel more financially organized. When you apply for a debt consolidation loan, the lender will send the funds to your creditors to pay off those balances, so the only monthly payment you'll be making is for the loan itself.

Having just one monthly payment instead of several can help ease the pressure of having to remember to make multiple payments each month before their due dates, which can be especially stressful if you don't have an Autopay option set up. Remember, if you do miss a payment or if it is late, the lender may report this to the credit bureaus, which could result in your credit score taking a hit.

Some personal loan lenders try to make your monthly payments as easy as possible by offering an interest rate discount just for enrolling in Autopay. SoFi and LightStream Personal Loans are just a couple of lenders that offer a 0.25% to 0.50% interest rate discount for making your monthly payments automatically.

You may not get approved for a lower interest rate

The interest rate you receive for any new loan or line of credit will depend on your credit score and credit report. Generally, a higher credit score will allow you to qualify for lower interest rates, while a lower credit score will land you higher interest rates. It's also a good idea to not apply for a new loan if you've recently applied for other lines of credit since too many hard inquiries on your credit report can lower your credit score and lead to higher interest rates. Personal loan and debt consolidation lenders do accept applicants with less than ideal credit scores —while you'll be approved for the loan, you'll likely receive a higher interest rate if your credit score is on the lower side.

Debt consolidation is ideal when you are able to receive an interest rate that's lower than the rates you're paying for your current debts. Many lenders allow you to check what rate you'd be approved for without hurting your credit score so you can make sure you're okay with the terms before signing on the dotted line.

If you are not comfortable with the interest rate you'll receive for your debt consolidation loan, you might want to consider using the debt snowball method instead, which entails paying more toward your debt with the lowest balance while paying just the minimum on all your other debts. Once that debt is paid off, you can move onto the second lowest balance and repeat the process until you're debt-free. This process allows you to knock out one debt faster, which can make you feel more accomplished and motivated to keep tackling the others.

You can face additional damage from late payments

As with any form of credit or loan, late or missed payments have the potential to hurt your credit score. Remember that any time you apply for a new loan or line of credit, you're opening up a hard inquiry on your credit report, and as a result, your credit score will be temporarily lowered.

Skipping a payment or making a late one on top of that can result in an even lower credit score. Many lenders will also charge extra fees for missing or late payments, which can end up making your debt consolidation process feeling even more costly.

To avoid the potential for missing or late payments, make sure you are enrolled in Autopay for your debt consolidation loan. That way, your monthly payments will be automatically deducted from your bank account prior to the due date and you won't have to worry about accidentally missing one.

Debt consolidation won't keep you out of debt

Lastly, while consolidating your debt may help you to pay it off faster, the loan itself won't keep you out of the debt cycle. Many borrowers mistakenly believe debt consolidation doesn't work for them because shortly after becoming debt-free, they fell back into old habits and eventually, more debt.

Debt consolidation itself is just another tool meant to alleviate multiple high-interest monthly payments. It's important to figure out what causes you to go into debt in the first place. According to financial expert and author Paco de Leon, many people may have certain certain root causes, like overspending when they're stressed out, which push them to rack up credit card debt they're unable to pay off. It can be really helpful to speak to a financial therapist or a financial advisor if you're having trouble keeping the debt away.

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