Should I Get a Debt Consolidation Loan?

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Point of Interest

Debt consolidation loans can be a great way to simplify your budget and get you back on track to building good money habits.

Debt is a part of most people’s day-to-day lives. For some of us, though, it may feel like the debt load is getting out of control. You might be asking yourself: how did my debt get to this point? And how the heck am I going to dig out?

You’ve probably heard of something called a “debt consolidation loan.” These loans seem to offer a light at the end of the tunnel, offering to simplify your life with one easy payment! But is it smart to consolidate debt? And is it a good idea to get a debt consolidation loan? Let’s unpack debt consolidation loans to see if they make sense for your situation.

What is a debt consolidation loan

A debt consolidation loan is a loan issued by the new lender that replaces your original debt with different terms — ideally, a lower interest rate, more comfortable monthly payment, or better repayment period. You can consolidate debt in a few different ways. Some common methods include obtaining a personal loan, using balance transfer credit cards, obtaining a home equity loan or taking a loan from your 401(k) plan.

To know whether you’ll qualify for a debt consolidation loan, you first need to obtain your credit score. FICO score is a standard measure of creditworthiness: The better your score, the lower your interest rate, generally. Don’t be discouraged if you have a less-than-perfect credit score. You may still qualify for a debt consolidation loan.

When to consider a debt consolidation loan

There isn’t a hard and fast rule to tell you that you definitely should get a debt consolidation loan, but there are a few characteristics that can help you judge if the loan is right for your situation. A debt consolidation loan can make sense if you can obtain a lower interest rate, shorter repayment period, or eliminate nuisance fees like early repayment penalties.

Generally, a debt consolidation loan is worth considering if it offers a fixed interest rate over a set repayment period and allows for overpayment with no early payment penalty. If you’re trying to consolidate credit card debt, then there is no set repayment period (which is why they tend to have high interest rates and can be so hard to pay off). In that case, choose the debt consolidation loan with the repayment period and a monthly payment that works best for your budget.

Your financial situation should be in relatively good order to improve your chances of obtaining good terms. Generally, this means a good credit score, a consistent source of income, and a debt-to-income ratio (DTI) of 40% or better.

When to avoid a debt consolidation loan

Consider avoiding debt consolidation loans that offer a variable interest rate or graduated rate over lengthy repayment periods, or loans that charge you a penalty fee for making early payments or overpayments. Balance transfer cards can offer lower introductory interest rates than personal loans, but they’re still credit cards. As soon the introductory period expires, the interest rate tends to balloon, sometimes over 20%.

More than anything, you should avoid debt consolidation if you don’t have a plan for establishing better money habits. Debt consolidation loans are part of a plan, not the plan. Better money habits include establishing a budget, then setting time aside each month to review your spending. 

It also may make sense to avoid a debt consolidation loan if you’re close to repaying the loan or if the terms don’t make sense for your situation.

Pros & cons of debt consolidation loans

Debt consolidation restructures your debt — it doesn’t eliminate it. The success of your plan depends on you! Don’t fall into the mindset that says, “It’s okay to spend ahead because I’ve got a big windfall coming!” That’s a ‘lottery’ mindset, and not responsible budgeting.

That said, a debt consolidation loan can be the first step on a path to building good spending habits.


  • Simplified budgeting: Debt consolidation loan can reduce multiple lenders into a handful, which can help to budget each month.
  • Clear end date: You’ll know exactly when the debt will be gone if you obtain a loan with a fixed repayment period. Then, you know you just need to make the payments on time.
  • Lower interest rate: Debt consolidation loans typically offer lower interest rates, meaning you pay more towards your principal each month and less to the lender.


  • May make debt load worse: A debt consolidation loan may make your situation worse, particularly if offered a variable interest rate and no set repayment period (common for balance transfer cards).
  • May not make your debt more efficient: Lower interest rates at longer or indefinite repayment periods may give you payment flexibility each month, but you may end up paying more interest in the course of paying off the debt. Balance your monthly payment against the shortest repayment period possible.
  • May not address the real problem: You risk doubling your debt if you obtain a debt consolidation loan but then run the balance back up on the original debt.

How to get a debt consolidation loan

First, decide which debts you wish to restructure using the debt consolidation loan. Figure out the highest possible monthly payment you know you can make each month against how quickly you want to eliminate the debt. You may find that you can only consolidate some of your debt. That’s okay! 

Next, review each offers’ terms and conditions. You’re looking for fixed interest rates over set repayment periods at a lower interest rate than your current debt. Try to find a loan that doesn’t charge you a penalty for early repayment or overpayment.

Tip: Start with your primary banking partner. They often feature special terms and conditions only existing customers can access.

You’ll receive a lump sum in cash a few days after you’re approved. Don’t be tempted to keep the cash! Send it directly to the debts you identified in step one!

Debt consolidation calculator

Debt consolidation calculators allow you to compare offers from different lenders. You can easily compare repayment periods, monthly payments, and interest rates in one setting.


Is it a good idea to get a debt consolidation loan?

A debt consolidation loan may make sense for you if it’s part of your plan to build good money habits. The key is to make sure the consolidation doesn’t make you pay more money under the new terms.

Do consolidation loans hurt your credit score?

Not in the long run. If you make your payments on time and in full each month, then your credit utilization ratio will go down (how much you’ve borrowed / how much is available to borrow). Reducing your credit utilization and regular payments in full improves your credit score.

What is the best loan to consolidate debt?

Loans that offer a fixed interest rate over a set repayment period that don’t penalize early payments or overpayments. Make sure you can afford the repayment amount each month.

Tip: Compare debt consolidation rates before submitting your applications.

How do you get approved for a debt consolidation loan?

The lender will review several factors specific to your financial situation, including your credit score, to determine their offer. It’s up to you if you choose to accept the terms.

The final word

Whether or not it’s smart to consolidate debt depends on you! If you have a plan to build good money habits, then a debt consolidation loan may be a good idea. These loans can help simplify your monthly budget by replacing unfavorable debt at better terms that fit your monthly budget.

Alexander Clark

Personal Finance Contributing Writer