Should I Consolidate Debt With a Loan?

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Point of Interest

If you have multiple debts, you might want to consolidate your debts with a loan. Doing this can simplify your financial situation and save you money in some cases.

Having to manage multiple debts can be a stressful burden, especially if you’re paying high rates of interest on your debts. You may be able to save money if you consolidate your debt with a loan that has a lower interest rate. 

But even if you can save money on consolidating, taking out a personal loan or home equity loan is a significant decision. In some cases, it can save you money. In others, it could cost you more. Before you decide, you need to weigh the pros and cons to see if debt consolidation a solution that works for you.

Debt consolidation with a loan

Debt consolidation with a loan means you take out a personal or home equity loan and use that money to pay off your other debts. That way you’re only dealing with one loan term and payment schedule.

You might consider this option when you can lower the interest you’re paying overall to save money on your debts. If you’re paying high interest on credit cards or other types of debt, you can pay off what you owe with a new low interest loan.

In some cases, this tactic wouldn’t make sense. For example, if the new loan has a longer term, even with a lower interest rate, you might end up paying more over time. Your first step to investigating this process is to organize all your debts, interest rates and term lengths. Then you can use a debt consolidation calculator to see possible savings.

When I should consolidate my debt with a loan

Consolidating your debt with a loan might make sense in the following situations:

  • You have a plan to pay off your debt. When you take out a loan, that’s a new form of debt you’ll need to have a plan for paying off. Not paying off a loan can have serious consequences. For example, if you fail to pay off a home equity loan, that could put your house in jeopardy. The terms of the loan need to make sense for your financial situation.
  • Your credit score is high enough for you to get a better rate. Your credit score is a major factor in the interest rate you’ll get with a loan. If your score is poor or low, you may not be able to get better terms.
  • It makes financial sense. You’ll only want to use this tactic when it saves you money. You’ll have to compare what you’d pay in interest when you’re still paying off your current debts to what you’d have to pay with a new loan. Remember that long loan terms, loan fees and variable interest rates that go up could all cost you more overall.

When not to consolidate my debt with a loan

In the following cases, debt consolidation with a loan might not be best for you.

  • You’re unable to meet loan payments. The required loan payments may be higher than what you’re managing now with all your debts. In this case, it may make more sense to pay more in the longterm than risk failing to make your loan payments, which could mean having to pay extra fees or putting your house at risk.
  • Your credit isn’t good enough to get a better rate. Applying for a personal loan or a home equity loan may result in a hard inquiry into your credit profile. This could lower your credit. Inquire about the credit requirements for the loans you’re considering so you avoid applying when your credit score doesn’t meet them.
  • It doesn’t make financial sense. Terms, fees and variable interest rates all affect how much you pay overall. If the cost of a loan exceeds the interest you’re paying on your current debts, it doesn’t make financial sense to consolidate debt with a loan.

Pros and cons


  • You could improve your credit score if you make your loan payments on time and in full, and it could keep credit utilization down.
  • You can reduce your overall interest rate and save money on what you owe.
  • You can lock in a low fixed rate that makes your payments predictable compared to variable interest rate payments.
  • You’ll only have to deal with one monthly payment, which can help you organize your finances and stay on top of payments.


  • You could end up in deeper debt if you’re unable to meet loan payments.
  • You could put your house at risk if you fail to meet home equity loan payments.
  • A personal loan or home equity loan could end up costing you more depending on the length of the loan.
  • You may be able to save more money with debt alternatives like balance transfer credit cards.
  • A loan might mean higher monthly payments, which you’ll need to make sure you can afford.
  • Extra payment requirements like a loan fee could add to your overall costs.
  • If you use a secured loan, you’ll have to secure it with collateral, putting that collateral at risk if you can’t make on-time payments.
  • You might end up with more debt if you add more charges to your credit cards while you have a consolidation loan.

Other alternatives to consolidate debt

  • 0% APR balance transfer credit cards: Move your credit card debt to a card where you get an intro 0% APR period. Pay off your debt as quickly as you can to save on interest.
  • Debt settlement: If you’re in way over your head with your debts, you may be able to work with a third-party that handles debt settlement to have them handle your debts. With debt settlement, the company will attempt to get creditors to agree to a single, reduced payment — but be aware that this route can greatly damage your credit and ability to borrow in the future.
  • Use the snowball technique: The snowball technique is to pay off your smallest debts in full and then work up to your largest debts. That way you eliminate debts one by one — which can make managing debt easier.

The final word

The decision of whether to consolidate debt with loan options is a big one because in order to do this, you’re taking on new debt. However, if you can save money on interest in the long run, this method can simplify your finances and save you some hassle. You’ll want to compare what you’re currently paying in interest with all your debts to what you’ll pay with a loan to see if it makes sense.