How to Consolidate Your Debt and Pros and Cons

Getting into debt is really easy if someone is willing to give you a credit line. It’s the getting out of debt that is the hard part.

Many financial gurus advise against debt consolidation.  There’s the old adage of “You can’t go into debt to get out of debt.

While consolidating does have its risks, it can be beneficial in helping you turn your finances around.

Pros and Cons of Consolidating Debt

First let’s look at the positives and negatives of using debt consolidation to helping you get out of debt once and for all.

Pros of Debt Consolidation

Debt consolidation is where you take a bunch of varied debts, varied interest rates, and varied minimum payments and pay them all off with one giant chunk of money.

You borrowed the giant chunk of money, but using it allows you to have one bill, one creditor, and one interest rate.

Consolidating your debts down into one payment can save you significant amounts of interest if you use the right consolidation tools.

Imagine taking a bunch of credit cards with 20% interest rates and dropping them to a 10% consolidation loan rate.  Even though that rate is high, you just cut your interest costs in half.

Also, consolidation only works if you don’t get back into debt while you’re paying off your consolidation loan.

Cons of Debt Consolidation

pros and cons of debt consolidation

Consolidating your debt can be a great way to help pay off bills but it can also be a money trap if you aren’t careful.

It’s worth repeating: debt consolidation only works if you avoid going into debt in the future, especially while you are paying off your consolidation loan.

The absolute biggest risk — and mistake that many people make — is they’ll consolidate $30,000 of debt using something like a home equity line of credit or a balance transfer on a credit card.  They temporarily save interest, but they don’t change the habits that got them into debt in the first place.

The results can be disastrous.

You max out a credit line on one side to pay off all your other debts, but then find yourself with a new stack of other debts that you now cannot pay.

Debt Consolidation Options

As risky as debt consolidation can be, it does pay off if you can be disciplined and work your debt payoff plan.

Here are some  debt consolidation options to consider:

Balance Transfers

If you are dealing with a lot of credit card debt one of the easiest ways to temporarily drop your interest rate is through a balance transfer.

With a balance transfer you open a new credit line with a new company, and they pay off the balance on your old card and put it on the new account.

A few years ago balance transfer offers were so prolific that some people took our extra credit just to have cash sitting in a savings account earning interest while paying 0% to the card company for 12 months.  After the financial crisis these offers dried up, but they are starting to come back now.

You will almost always pay a balance transfer fee of 3% for your new credit card company to transfer the funds, but you will usually get 0% interest for 12 to 18 months after that as a reward.

This buys you time to pay off your balance as much as possible — or lets you pay just the minimum payment while you focus your debt payment on other debts with higher interest rates.

Related: The Best Zero Percent Balance Transfer Credit Cards.

Personal Loans

A personal loan is where a financial institute extends a loan to you directly in order to pay off some of your debts.

These loans are fixed rate and for fixed amounts which is a great thing: you don’t have to worry about the interest rate going through the roof or getting yourself into trouble by racking up a higher balance.

The whole point is to take the money, pay off your higher interest rate debts, and send your payments in toward the fixed loan cost.

HELOC and Cash-Out Refinancing

Both home equity lines of credit (HELOC) and Cash-Out Refinancing are ways you can consolidate debts, but they are significantly more risky than unsecured credit lines like a balance transfer.

With these loans you are taking equity out of your home and using it to pay off your debts.

This means you can get rock-bottom interest rates (refinancing rates are around 3-4% depending on if you take a 15 or 30 year term) and save a ton of money in interest.

It also means that if you default on your payments, the bank takes your home.  Then you’ll be up to your eyeballs in debt and have no where to live.  Losing your home is a great risk to this type of debt consolidation.  However, with the low, low interest rates you can get it can be tempting.  It is the classic risk versus reward scenario.

P2P Loan

Peer-to-Peer lending is a relatively new contender to the lending scene.

Instead of going to a financial institution like a bank or credit card company, you turn to your peers for a loan.  You put up the details of your debt, why you’re wanting to use the funds, and the P2P site dictates your credit worthiness.  Groups of people all chip in small amounts of money in your loan in hopes that as you pay it off they will get their principal back plus some interest for their risk.

This method isn’t as cut and dry as some of the above methods because it isn’t as common.  Also, your interest rates may not drop significantly — it all depends on how your credit worthiness is determined by the P2P site. However, it is another method of paying off debts with a consolidation loan that many people find useful.

Have you ever consolidated your debt? How did you do it?

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Published or updated September 25, 2012.


  1. We tried to consolidate my girlfriend’s student loans but couldn’t find anywhere that offerred an adventageous fixed interest rate so we didn’t do it.

    • I consolidated some of my student loans, but I agree – the options are surprisingly limited. You would have to have a really high interest rate before to make it worth it because most loans amortize over such a short period of time.

  2. There are various types of loans that can be considered if a person is in trouble with his/her finances. Many people are suffering from this problem and should be acquainted on the effective methods of paying your debts. Choose the most suitable way to lessen your burden in settling your finances.

  3. Suzana Daniels says:

    Debt consolidation is the first thing that comes into our minds when we are deeply buried under debt.Consolidating debt is the first thing that comes into our minds towards making payments for that piling heap of debt which we all are afraid of.However, in this process we tend to forget that there are different options for debt consolidation that we need to weigh prudently before blindly agreeing to them.The reason for this is that any debt relief option that we choose to bring down the debt amount , is backed by a certain amount of risk factor and all these arrangements would help us only if we can ensure ourselves of not getting into further debt .So I would rather think of cutting down on my existing expenses if I am already drowning under debt rather than adding more debt onto it.

  4. Excellent article by Kevin on the Loans option for Consolidating Debt. There are many potential borrowing options aside from the named consolidation loan product. Its also worth noting that ‘debt consolidation’ as a topic by convention encompasses other options that actually only consolidate repayments. These are the Plan/Program and Settlement approaches. Pros, cons and pitfalls are essential to understand, whatever course of action you take.

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