What Is Debt Consolidation?
Debt consolidation is when a borrower takes out a new loan and then uses the loan proceeds to pay off their other individual debts. This can include all types of debts from credit card balances, student debt and other personal loans.
Benefits For Debt Consolidation:
- Makes it easier to manage debt by combining loans into a single, streamlined payment
- Could lower a borrower’s overall interest rate by consolidating into a secured loan, zero-interest credit card balance or low-interest personal loan
- May lower a borrower’s overall monthly payment on debt by extending the loan term — though this can result in higher interest costs over time
- Fixed loan payments can help borrowers pay their debt off sooner — especially if consolidating a large amount of credit card debt
Disadvantages of debt Consolidation:
- Creditors may charge balance transfer, loan origination or closing fees
- In some cases, consumers may have to pledge their assets as collateral
- Does not guarantee a lower interest rate—especially for borrowers who don’t have a strong credit score.
- A longer repayment period may result in a higher overall cost
- Doesn’t require borrowers to improve their approach to money management, so the debt may return.