Debt Consolidation Loans: Good or Bad?

by | Feb 1, 2015

Have you recently found yourself drowning in auto loans, student loans, and credit card debt?  You’re not alone. Millions of American consumers are having trouble with paying their monthly credit card bills because they’ve gotten overextended, recently lost their job, or had to take care of another financial emergency. Weighing the pros and cons of loan consolidation is essential before making a commitment to paying off your credit cards using a method like debt consolidation.

The Pros of Debt Consolidation

Depending on your situation, there are a variety of ways to consolidate your credit card bills and other loans.  Some of the ways including using the equity in your house, calling a third party organization to help you with payments, and taking out a personal loan to pay off your entire credit card balance.

  • Using a home equity loan – The major benefit to taking out a home equity loan for consolidation is that you’ll save money with lower rates. You might be able to deduct the interest you pay on the loan as well.
  • Using a debt consolidation firm – Debt firms work by allowing them to negotiate with your credit card companies, and then paying them directly. This is an easy way to consolidate your debt because you won’t have to worry about making monthly payments to multiple creditors. Before you hire a consolidation company, use a loan calculator to compare the fees being charged by the firm against the interest rate you could get with a personal loan.
  • Using a personal loan – A personal loan is a great way to pay off credit card debt because you’ll be able to save money with interest rates. Credit card interest rates are always high, unless you pay the balance off in full. This option also allows you to make one low monthly payment instead of multiple payments to different companies.

Generally speaking, if you have serious trouble with credit card debt, consolidation is a great option. If you have less than perfect credit and you don’t own a home, you can still use a consolidation firm to help you pay off the debt or ask a friend or family member for a personal loan. If paying back a friend or family member requires you to include interest, use a loan calculator first to determine if the option still suits you.

The Cons of Debt Consolidation

If you have a poor payment history with your credit cards, consolidation may not be the best option for you.

  • Using a home equity loan – When you take out a home equity loan, you’re putting your home on the line for your credit card debt. If you’ve had trouble paying your bills in the past, this is not a good option for you.
  • Using a third party consolidation firm – You have to be careful when talking to firms over the phone. Many of these companies charge outrageous fees to help you with your debt and the payments can be enormous. Use a debt consolidation calculator first to determine the overall cost when choosing this option.
  • Using a personal loan – If you can’t pay the money back, your credit or your relationships with friends and family who gave you the money will be ruined. Even asking for the money from someone you know can be embarrassing. Use this as a last resort, if at all.

Being able to pay your bills on time is an essential factor in all three options. If you weren’t able to pay your credit card bills on time because of lack of financial planning, consolidation may not be for you.

Alternatives to Debt Consolidation

Consolidation can be a huge financial and psychological burden. To avoid the unwanted stress, consider the following alternatives:

  • Negotiate interest rates – If you feel like you can still keep your credit cards open but want to reduce the amount of debt you have now, try to negotiate the interest you pay on each card. If you’ve been an exceptional customer and have paid your bill on time, the company might be willing to cut you a deal.
  • Debt payoff planner – Use a planner to make an aggressive plan to pay off your debts. Depending on how much credit card debt you have, this can take several months or years, but doubling or tripling your credit card payments and reducing other non-essential expenses can be a rewarding experience in the end.
  • Debt settlement – Calling your credit card companies and asking for a settlement is the best place to start. It doesn’t hurt, and many financial companies will consider it if you close the credit card account first. This option won’t work with all loan consolidation issues, but for serious cases it may be a viable option.


Each option requires a significant amount of research and planning. Regardless of whether you choose to consolidate your debt yourself or get help from a debt consolidation firm, be sure and use a debt payoff calculator and track where you are at all times. In some cases, if you need both loan consolidation and credit card consolidation, two different methods of repayment will be necessary.

There will be unpleasant times ahead for sure.  Paying off debt is an emotionally taxing process, and at first it will feel overwhelming.  Just remember this: The best time to start was a year ago.  The next best time is today.

Photos by Quazie.


  1. Arturo

    Very helpful I have just started to pay down my credit cards and avoiding to take out high interest loans. I also do more budgeting. Planning to be debt free in 3 to 4 years.

  2. Simon Au

    Me got big debt total credit card outstanding 500k how to reduce? Pls advise!

  3. Javier


  4. Taracourchene

    When am I able to pay bills

  5. Linda

    I have about 10 thousand dollars in credit card debt alone and its been about 3 years now so it already has affected my credit negitively.

    Would it be better to settle with them by payong less than owed or paying them off in full slowly? I see it as it doesn’t matter because my credit already is bad so what does it matter…

    • Lukas

      Since you have $10 grand in debt and been in that much debt for 3 years, I believe that you think that you are going to be in debt forever and since you are probably paying a lot of interest along with a high minimum payment, you feel like you are getting no where when it comes to paying off the debt and it’s morally depressing because you are consistently paying money and your debt isn’t going down. I’m saying this because I was in the same position as you are. Now I don’t know how many credit cards you have, but I had 3 credit cards each with a different credit limit, the highest one being a $5000 limit and I had spent $4800 on it. So at first, I listened to what everyone told me to do which was to try to pay off the card with the highest balance first because the card with the highest balance is making you pay the highest amount of interest. So I was paying an extra $100-$200 dollars on top of the minimum amount due on that card, and pay the minimum on the other cards. However, after a few months, I paid out a total of around $1200 dollars on that 1 card but the total balance only decreased by $200 dollars, which got me completely depressed because I was paying out all of this money, while not putting a dent in the total balance and my credit score was not improving, so I felt like a complete failure. Then I realized that if I actually wanted to get the debt down, I needed to make sure I felt like I was getting somewhere and I needed to feel like I was succeeding in paying off my debt in order to keep it up. So I found the card with the lowest balance, and started making payments that were double or even triple the minimum amount due on that card, while paying an extra $5 dollars on top of the minimum amount due on the other two cards (you don’t want to pay the bare minimum amount due, even if you just add $5 to the payment) . Doing it this way will most likely end up in you paying more money in the end due to the interest for the card with the highest balance. However, after a few months of paying an extra $100 or $200 per month on the card with the lowest balance, I became so positive and actually felt like I was making a dent in paying off my debt because the total balance of the lowest card was 2/3s the way paid off. I saw my credit score improve since my credit card utilization was decreasing. You will now have a lower minimum payment due for that card and you can either continue to pay off that card, or use all the money that you were making extra payments with on that one card, and use that money to do the same on your second card. You should even have more money to spend on payments since the card with the smallest balance would either be paid off in full or close to it. This is the strategy that worked for me because it made me feel good because I was seeing the results with my own two eyes. Even though I was still paying a lot of interest on the card with the highest balance, I still felt great because I saw 1 of my 3 credit cards paid off, I saw my credit score increase and I felt amazing and it even made me feel motivated to pay off the other cards because I realized debts can actually be paid off if you put your mind too it. Even though this method makes you pay more money in interest over the long term, I didn’t really care because seeing my total balance decrease by a good amount every month made me feel like I was actually accomplishing paying off my debts and it didn’t set me up to fail and it prevented me from giving up because I saw improvement every month and I actually saw my debt decreasing every month.


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