What are the pros and cons of using debt consolidation? Uncover the advantages and disadvantages of using debt consolidation right here. We provide the key details to help you decide if this is the best debt management move to address multiple ongoing personal debts. 

You may benefit from additional advice and support from a debt charity or debt counseling service. Start with the advantages and disadvantages discussed below to improve your understanding first. 

How does debt consolidation work?

Debt consolidation is when someone with multiple debts arising from credit cards and personal loans consolidates these debts into one single debt. It is a debt management technique used to prevent debts from getting bigger and more problematic, usually by accessing a lower interest rate proportionally compared to the interest rates you were paying when you had multiple debts  (not guaranteed!). Additionally, it’s used to make it easier for debtors to stay on track and budget for their debts effectively. 

The most common way to combine debts is to take out an unsecured debt consolidation loan and use the personal loan to pay off all existing credit. Afterwards, the debtor will have one single debt and one monthly payment, instead of multiple creditors and payments to juggle each month. An alternative method to using a loan is to use a credit card balance transfer card. Further details are explained below. 

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This 4 question debt calculator will tell you if you’re eligible.

What is the total amount of your debt?

What debts can be included?

Any type of consumer debt from a loan company, catalogue or credit card provider can be consolidated. Some debts are not worth consolidating due to their low-interest rates or uniqueness, such as student loans. Just because you’re consolidating your debts, doesn’t mean you have to consolidate every debt. You should make decisions that put you in the best financial position. 

What is a debt consolidation loan?

A debt consolidation loan is a loan used for the specific purpose of debt consolidation. When you take out one of these loans, the money is to be used to pay off your other debts and for no other reason. The loans are usually unsecured, meaning no assets are used as collateral to ensure you make repayments. 

To qualify for one of these loans you must meet the lender’s approval criteria, which will involve checking your credit score. This can be a problem for some debtors as their recent credit history can be poor and cause the new loan application to be rejected. 

However, some lenders offer debt consolidation loans for people with poor credit available. If you have poor credit and worry you will not be able to get a new loan, we recommend checking out our free guide. 

What is a credit card balance transfer?

These loans can be used to consolidate debts from personal loans, credit cards or a combination of both. But if you only have existing debt from credit cards, there is another way to consolidate your credit card balances.

Using a balance transfer credit card, you can transfer any existing credit card debt from multiple existing credit cards to a new one. If you can get a card with a lower interest rate, and/or 0% APR for the first few months, you can save money or access a free payment holiday, respectively. Tackling credit card debt in this way may involve additional fees you need to know about first. 

More information on how to source and utilise a balance transfer credit card can be found here.  

Are there other ways to consolidate debts?

interest credit

A third way of consolidating your debt is to take out a secured new loan through remortgaging. By remortgaging your property, you could release some home equity and use the money to pay off your debts. 

However, this shouldn’t be a financial decision taken lightly, and you may want to use credit counseling before making any moves. There are an array of factors that should be considered before remortgaging for debt consolidation purposes. You might need the help of a professional mortgage advisor too. 

Debt consolidation advantages and disadvantages

Debt consolidation might be the best debt management strategy for you – or it might not be. Understanding the pros and cons of debt consolidation and considering them against your personal circumstances will help you make the right decision. 

If you’re considering debt consolidation today, read on to weigh up the potential benefits and disadvantages. 

What are the benefits of debt consolidation?

#1: Easier to budget and manage 

If you consolidate debt, you are making it much easier to budget for your new repayment than it would be to pay off multiple debts and credit card balances each month at different times. Instead of worrying about numerous payment dates every month, there’s now only one! This makes managing your finances simple, less stressful, and arguably less likely that you will overspend and default on monthly payments in the future. 

consolidate debt

#2: Protecting your credit score

By making it easier to meet monthly repayments on time, you are reducing the chances of missing any payments at all, and therefore protecting your credit score from further damage. This is especially useful if you plan on applying for a mortgage in the not-so-distant future after paying back your single new debt.

#3: Potential lower monthly payment

Debt consolidation becomes even more worthwhile if you can take out a new personal loan or balance transfer credit card that has a lower monthly payment than the cumulative amount you were paying back on the other debts. 

The interest rate you get will be influential in this, but you should always be aware of other possible fees. Many debtors manage to secure a new debt with better repayment terms, meaning they pay less than they were before. 

What is the disadvantage of debt consolidation?

#1: It’s not available to everyone

Even though consolidating your debts would be the best choice for you, it may not be available to you. People with a poor credit history might not be able to get one of these loans in the first place. A lender may be unwilling to lend further credit to someone if they have a poor credit rating, which is more likely considering the reason for needing the loan.

higher interest

#2: You might pay back more

Debt consolidation will not guarantee that you will get a loan with low interest, and you may have to pay back more than you are doing now. Or you may pay back less each month but have to pay back more over the life of the loan. If the margins are small, debt consolidation can still be worth it just to streamline repayments and help you avoid payment defaults. 

As you can tell by the advantages and disadvantages of debt consolidation, the financial aspect can be highly dependent on personal circumstances and the loan interest rate you qualify for. 

#3: Additional fees and charges 

A debt consolidation personal loan or balance transfer credit card may include additional fees and payments that you wouldn’t have to pay if you didn’t consolidate your debts. This is more relevant to a balance transfer credit card, which typically includes a balance transfer fee. 

When is debt consolidation a good idea?

Debt consolidation is usually a good idea if you have taken the time to fully understand the process you’ll take and your new monthly payments are going to be lower than they were before consolidating. If you’ve managed to find a debt consolidation loan with a lucrative interest rate then it is probably a good idea for you. 

If you’ve found a loan that is comparable to the interest rates you’re paying on existing loans and credit card debt, this may still be a good idea. Even though you might not be able to reduce payments each month, having just one repayment can make managing your money easier. 

However, there may be times when there are even better debt management solutions available. Credit counseling and debt charities should be your first point of call when needing advice.  

Do THIS before applying!

After reading the advantages and disadvantages of debt consolidation, you may have decided that this method can help you. Before you find a loan provider and make your application, you should check your credit file for any errors. Spotting an error and having it removed could be the difference between being accepted and rejected.

You can access your credit history online using a credit reference agency website. If you see a mistake, report it to the company that made it and ask them to get it removed. If they don’t cooperate, you can then ask the credit reference agency to remove it for you. And if the website you used offered you a free trial, don’t forget to unsubscribe or you will be billed. 

When is debt consolidation bad?

Debt consolidation would be a bad idea if you can only access a loan with high interest, causing you to pay more each month, or pay significantly more over the life of the loan. It’s also not a good idea if there are more suitable debt management solutions available. 

One of the cons of debt consolidation is that it can give the feeling to the debtor that they have immediately paid off a chunk of their debt. It gives the illusion that they are in a far better financial position than before, even immediately after consolidating debt. In reality, at such an early stage they are in a similar position and they are still vulnerable to a financial emergency. Moreover, debt consolidation does not solve underlying issues for the reason some people got into debt in the first place. Of course, this does not apply to everyone. 

Overspending after consolidating debt is not uncommon and is one of the biggest reasons why debtors who take this strategy can get themselves into bigger debt down the line. Even after debt consolidation you will need to monitor your finances closely and use a monthly budget. 

Does debt consolidation affect your credit score?

Debt consolidation will not affect your credit score. The only way debt consolidation will have a significant impact on your credit file is if you apply for multiple debt consolidation loans in a short period. Doing so causes each lender to leave a search mark on your file. Having too many of these searches in a short period can harm your file. This is because it appears like you are erratically applying for credit without giving it careful thought. 

On the contrary, using debt consolidation can improve your credit score in hindsight. Instead of struggling to meet repayments and potentially defaulting on others, consolidating debt can protect your credit file – as discussed in our pros of debt consolidation section earlier. 

Is debt consolidation right for you?

debt free

Pairing the advantages and disadvantages of debt consolidation with your personal situation is the only way to know if it’s the best debt management option available. Use our information above to help inform your decision, and do more reading about the subject. Unfortunately, there is no fixed answer for everyone, but the information above is a fantastic place to start. 

The good news is that we have other free posts about debt consolidation here on MoneyNerd, and there are other free and insightful resources online. 

There are plentiful debt management strategies and it’s likely you’ll have more options than you realise right now – see below for details on some of them. But again, it is always best to get support from a debt charity or debt management company. They can guide you to a debt-free life again. 

Some debt consolidation alternatives

Some of the other ways that people reduce their debts and make them more manageable is using:

  1. The snowball method – paying off the minimum payment on each debt and then using any remaining money to clear one debt at a time. 
  2. Debt relief order – a way to potentially wipe all debts if you have less than £50 disposable income per month and no assets.
  3. Individual Voluntary Arrangement – a way to consolidate debts and wipe all of them after five years. 
  4. Debt settlement – making a settlement offer to creditors below the total value to save you money. You may want to consider this before trying to combine some of your debts if it is affordable to you. 
  5. Bankruptcy – this is seen as a nuclear option but bankruptcy can be smart and the best move for you. Access credit counseling advice before choosing bankruptcy. 

You can read about them all in detail on MoneyNerd! 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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