When Is Debt Consolidation a Good Idea?

When debt and bills hang over your head, you want to take action. But deciding what to do can be tough. If you’re considering debt consolidation, you may be questioning if it’s the right call for you and wondering what the catch might be.

A great first step is what you’re doing right now — researching. After all, a debt consolidation loan can help lower monthly expenses and stress. But make sure the loan terms work for you. Here are some situations and examples to illustrate the truth about debt consolidation and when consolidating debt with a personal loan might be a good idea.

You can’t afford your monthly payments

Everyone’s financial situation is different. Even if you have a handle on your monthly bills, something could happen that is out of your control and puts you in a tough spot. With a debt consolidation loan, the terms of your loan could allow you to keep paying off your debt consistently but pay less each month. For example:

Victor had four different credit cards that amounted to $21,000 in debt. He was able to make his minimum monthly payments of $750 but his rent went up and he needed a way to save at least $200 a month.

Victor applied for a debt consolidation loan for $21,000, was approved and paid off all his credit card debt. The terms of his loan are 60 months with an 18% APR, which means he only pays $533.26 a month now instead of $750. That’s nearly a third less than before. By saving $216.74 a month, he can afford his new rent with extra money to spare.¹

To see how much you could save with debt consolidation, check out our debt consolidation calculator.

You have trouble paying bills on time

People struggle to make on-time monthly payments for a wide variety of reasons.

Jenny has bills from a hospital stay, an auto repair, the IRS and three store credit cards that are due every month. She frequently travels for work, however, and even though she writes all of her due dates on a calendar, inevitably something falls through the cracks.

Dimitri and Janice have separate bank accounts and have to juggle funds to make on-time payments. One monthly payment would simplify their lives.

Gretchen just moved for a new job and is worried her mailed loan statements will not reach her new address in time, making her payments late.

Tony’s payday doesn’t match up with the due dates for his loans and credit cards. He constantly worries he won’t have sufficient funds to cover multiple payments on top of other household bills.

Irene is a procrastinator by nature. She knows she’d be more successful paying one bill on time than managing four.

Tracking all your due dates can get confusing. With debt consolidation, you can save stress and avoid late fees by only having one monthly payment to remember.

You feel overwhelmed by debt

When debt creeps up on you, you can feel like you’re underwater. An unexpected event like an expensive medical procedure can suddenly turn your current financial situation upside down. Despite making monthly payments, sometimes balances – sustained by high interest rates – never seem to go down.

Unlike revolving credit, a debt consolidation loan is an installment loan, which means that, as long as you pay on time, your balance will steadily decrease and be paid off within a set amount of time. (Learn more about the difference between revolving credit and installment credit.) With reduced monthly payments and a final payoff date, many find that a personal loan for debt consolidation can provide much-needed financial and psychological relief.

You could potentially save money on interest

Saving money on interest happens when you refinance a loan at a lower rate. Steve broke his ankle and didn’t have health insurance. His hospital bills totaled $5,000, and he ended up taking a high-interest loan from the hospital. Steve realized he could pay off his medical debt and one of his high-interest credit cards with one new personal loan. Thanks to his good credit score, he was approved for an interest rate 10% lower than both accounts he paid off.

Alicia learned that her store credit cards and roof repair company were charging far higher interest rates than the debt consolidation loan for which she qualified. She combined them all into one monthly payment with a lower fixed interest rate. Her debt consolidation spread her payments out over five years, considerably lowering her monthly payments and saving money on interest.

Christy was routinely incurring late charges. A debt consolidation loan simplified things so she no longer missed her due dates. In time, her improved credit score saved her even more money by helping her qualify for lower interest rates for the car loan she needed.

Saving money on interest can be good for anyone. And if you have one or more debts with high interest rates, rolling them into one new debt consolidation loan could help you save money on interest month after month.

You’re unable to pay down balances quickly

Making minimum payments can be a slow, painful crawl. If you’re only paying the minimum payment, some debts might take years (and years and years²) to pay off, since the majority of your monthly payments go toward interest, not principal.

With a debt consolidation loan, you can pay off multiple high-interest debts, including high-interest credit cards, at once.

The promise of a blank financial slate is great for people who can only afford to make minimum payments and/or are anticipating a large purchase like a home or car and want to erase balances and free up available credit.

Be sure to address the spending habits that may have put you in a financial bind in the first place. Are you living beyond your means? Impulse shopping online? Relying too heavily on credit cards? Start on a healthy road by creating a budget and sticking to it.

You want to improve your credit rating

A personal loan for debt consolidation might also boost your credit score. Since you’ll be paying off debt on multiple accounts (including sources of revolving credit such as credit cards) and increasing your available credit, you’ll lower your credit utilization ratio, an important factor in determining your credit score. Make monthly payments on your new debt consolidation loan on time, and you might raise it some more.

Beware potential pitfalls of debt consolidation

Debt consolidation doesn’t erase your debt. Instead, you walk away with a refinanced loan that has extended repayment terms. Sometimes those terms can work against you if you end up paying a higher interest rate or extra fees, so read the fine print carefully.

A promotional lower interest rate on a consolidation loan can sometimes change to a higher one – costing you more money in the long run than you would’ve spent without the consolidation loan.

Debt relief programs are the number one consumer complaint received by the Federal Trade Commission³. Read up on the dangers of debt settlement companies before taking the leap.

When debt consolidation might not be a good idea

These can vary per person, but a few common scenarios include:

• Your debt amount is relatively small
• Your debt consolidation loan offers have a higher interest rate than your existing debt
• The fees for your debt consolidation loan will eliminate all your potential savings

Debt consolidation is a good idea if it’s good for you

Find out exactly how debt or bill consolidation works and you’ll discover many upsides. However, those upsides don’t necessarily apply to everyone, so it’s up to you to research and decide what’s best for your financial situation. If you’re still undecided or could use some more information, check out these signs that debt consolidation may be right for you.