Should You Consolidate Your Debt?

Debt consolidation combines multiple debts into a single payment, potentially with a lower interest rate. But it's not right for everyone. Here's how to decide if it makes sense for you.

What Is Debt Consolidation?

Debt consolidation means taking out a new loan or credit line to pay off multiple existing debts. Instead of multiple payments to different creditors, you make one payment to one lender.

Consolidation Options

Personal Loan

Borrow a fixed amount at a fixed rate, pay it off over 2-7 years.

• Pros: Fixed payment, clear payoff date, potentially lower rate
• Cons: Requires good credit for best rates, may have origination fees

Balance Transfer Credit Card

Move high-interest debt to a card with 0% intro APR (usually 12-21 months).

• Pros: 0% interest during promo period, can save significant money
• Cons: Balance transfer fee (3-5%), high rate after promo ends, requires discipline

Home Equity Loan/HELOC

Borrow against your home's equity.

• Pros: Lower rates (secured by home), potential tax deduction
• Cons: Your home is collateral—you could lose it if you can't pay

401(k) Loan

Borrow from your retirement account.

• Pros: Easy approval, lower rates, pay interest to yourself
• Cons: Hurts retirement savings, must repay quickly if you leave your job

When Consolidation Makes Sense

• You can get a lower interest rate than your current debts
• You have a plan to avoid accumulating new debt
• The monthly payment fits your budget
• You'll pay less total interest over the life of the loan
• You're committed to paying it off, not just shuffling debt around

When It Doesn't Make Sense

• You can't qualify for a lower rate
• You haven't addressed the spending habits that created the debt
• The consolidation loan has fees that offset savings
• You'd be extending your repayment period significantly
• You're tempted to run up the cards again after paying them off

Red Flags to Watch For

• Companies that guarantee approval regardless of credit
• Upfront fees before services are provided
• Pressure to act immediately
• Advice to stop paying creditors without a clear plan
• Promises that seem too good to be true

The Math: Does It Save Money?

Calculate your total interest cost under both scenarios:

1. Current total interest if you continue as-is
2. Total interest with consolidation (including any fees)

Use our debt calculator to run the numbers.

The Bottom Line

Debt consolidation is a tool, not a solution. It can help you save money and simplify payments, but only if you also address the behaviors that led to debt. The best consolidation strategy is paired with a commitment to not accumulating new debt.