Keep track of payments and balances on existing bills can be challenging with credit cards, student loans, and auto loans. Although combining several loans into one may simplify your finances, it is unlikely that the fundamental problems will be resolved. For this reason, before agreeing to a new loan, it’s crucial to comprehend the benefits and drawbacks of debt consolidation.

What Is Debt Consolidation?
Debt consolidation is the process of paying off multiple debts with a new loan or balance transfer credit card—often at a lower interest rate.

Is Debt Consolidation a Good Idea?

Debt consolidation is usually a good idea for borrowers who have several high-interest loans. However, it may only be feasible if your credit score has improved since applying for the original loans. If your credit score isn’t high enough to qualify for a lower interest rate, it may not make sense to consolidate your debts.

Pros of Debt Consolidation

Consolidating your debt can have a number of advantages, including faster, more streamlined payoff and lower interest payments.

1. Streamlines Finances
Consolidation can also improve your credit by reducing the chances of making a late payment—or missing a payment entirely.

2. May Expedite Payoff
If your debt consolidation loan is accruing less interest than the individual loans would, consider making extra payments with the money you save each month.

3. Could Lower Interest Rate
If your credit score has improved since applying for other loans, you may be able to decrease your overall interest rate by consolidating debts—even if you have mostly low-interest loans.

4. May Reduce Monthly Payment
When consolidating debt, your overall monthly payment is likely to decrease because future payments are spread out over a new and, perhaps extended, loan term.

5. Can Improve Credit Score
Applying for a new loan may result in a temporary dip in your credit score because of the hard credit inquiry. However, debt consolidation can also improve your score in a number of ways.