Is debt consolidation a good idea?
Sometimes it's the cheapest way out of high-interest debt. Sometimes it's a lower payment that costs more and a fresh set of empty cards. Here's how to tell which.
How debt consolidation works
You take one new form of credit and use it to pay off several existing debts. Instead of four due dates and four rates, you have one. The four common ways:
| Method | Typical cost | Best for | Watch out for |
|---|---|---|---|
| Personal loan | Fixed APR, 0–10% origination fee | Card balances you'll clear in 2–5 years | Fees deducted from proceeds |
| 0% balance transfer | 3–5% transfer fee | Balances you can clear within the intro period | High rate after the intro ends |
| Home-equity loan / HELOC | Lower rate, closing costs | Large balances, homeowners with equity | Your home secures the debt |
| Debt management plan | Small monthly fee via nonprofit counsellor | People who can't qualify for good credit | Cards are usually closed |
When it's a good idea
- The APR, fees included, is well below your current weighted rate. A 12% loan replacing 25% cards is a real saving; a 22% loan with a 6% fee usually isn't.
- The term isn't much longer than your current payoff. Stretching to seven years can make total interest rise even at a lower rate.
- The payment fits comfortably, so you won't lean on cards again to cover gaps.
- The spending that created the debt has stopped.
When it backfires
The most common failure is running the cleared cards back up, ending with the loan and new card debt. The second is choosing a long term for a low payment and paying more overall. The third is turning unsecured card debt into debt secured by your home with a cash-out refinance or HELOC: if things go wrong, the stakes are now much higher.
How to decide in ten minutes
- List every debt with its balance, APR and payment in the debt consolidation calculator.
- Enter a real offer, fee included. Pre-qualification with several lenders usually uses a soft credit check.
- Compare total cost and debt-free date, not just the payment.
- Check the alternatives: a balance transfer for smaller balances, or the avalanche method with no new credit at all.
If the numbers only work on paper because the payment is a stretch, or if collection calls have already started, talk to a nonprofit credit counsellor before borrowing.