The Pros and Cons of Debt Consolidation Loans

If you have multiple sources of high-interest debt, such as from your credit cards, medical bills, or other unsecured loans, debt consolidation loans could work very well for you. They’re a great way to reduce your monthly debt payments and pave a path towards financial independence.

While they’re certainly popular, debt consolidation loans have their pros and cons. They’re not a one-size-fits-all solution. Move methodically when refinancing your debt. Consider all your options and see if they tangibly improve your financial situation. Here’s more on how debt consolidation loans work and their benefits and drawbacks.

Pros of Debt Consolidation

Debt consolidation loans have their pros and cons. When done right, the positives greatly outweigh the negatives. Here are all the benefits of consolidating your debt.

1. Reduced Interest Payments

One of the biggest benefits is reducing the interest rate on your loan. Consider that the median average credit card APR in 2024 is 24.74%. Compare that to the average personal loan interest rate which is less than half as high at 11.92%. A quality debt refinancing program can save you thousands of dollars a year.

2. Simplified Finances

Another advantage of debt consolidation is that it can simplify your financial situation to a great extent. For starters, when you’re paying less in debt payments, you can afford to pay off the debt quicker, make essential purchases, or save for a rainy day. What’s more, now you only have to track and pay off one loan instead of multiple loans.

3. Improved Credit Score

Consolidating debt can have a positive impact on your credit score. As the pros and cons of debt consolidation loans go, this is a big one. As your interest payments go down, you can afford to pay more every month to clear your debt. You can also pay off the loan earlier, meaning it’s off your credit report sooner. Altogether, this can help boost your credit score and make you a more viable candidate for other necessary loan products. 

4. Access to Bigger Purchases

Debt consolidation loans can help you work towards bigger expenses down the line, including a mortgage or college tuition for your children. An improved cash flow is part of this, helping you save for a big expense later, but so is the fact that your credit report is better. With a higher credit score and lower debt-to-income ratio, lenders are more likely to offer you more reasonable terms on future loans.  

Cons of Debt Consolidation

Along with pros, debt consolidation loans also come with cons, usually when you haven’t done your research beforehand or haven’t chosen the best possible loan option.

1. There May Be Added Costs

Sometimes, debt consolidation loans can come with extra costs or hidden fees. This can include annual fees, loan origination fees, or balance transfer fees and closing costs if you’ve opted to consolidate via a balance transfer card. Make sure you read the fine print before accepting a loan so that debt consolidation is a pro and not a con for you.

2. You May End Up Paying a Higher Rate

The point of debt consolidation is to pay off the principal at a lower interest rate. However, if you have multiple active debts and you haven’t correctly calculated the average interest rate on them all, you might end up choosing a consolidation loan with a higher interest rate than that of your current debt.

3. Missed Payments Can Harm Your Credit

Once you’ve drawn a loan, ensure you keep up with your payments. If you miss one of your payments by more than 30 days, it could trigger late payment fees and set your credit score back even further. As pros and cons of debt consolidation loans go, this is certainly one to watch out for.

4. It’s Not a Silver Bullet

It’s important to remember that debt consolidation by itself doesn’t solve your financial problems; you still have to pay back the loan amount. Combine debt consolidation with other actions, including reducing your expenditure and stretching your monthly budget as far as possible. Start building an emergency fund that you can rely on in emergencies without creating new debt.

Consolidate Your Debt From the Comfort of Your Home With Lending Tower

Lending Tower is an online lender with an A+ rating on the Better Business Bureau platform. We’re a trusted financial partner to thousands of customers, helping them reduce their debt and achieve their financial goals. See some of the most competitive rates and rapid funding when you partner with Lending Tower. Check your potential interest rate today. Reach out to one of our loan advisors 24/7 to learn more about how debt consolidation loans work or their pros and cons.