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Advantages & Disadvantages of Debt Consolidation Loans

Consumers facing a lot of debt from multiple creditors may want to consider consolidation. So what is debt consolidation and is it the right option? Let’s take a look at the advantages and disadvantages of debt consolidation loans to give you a better picture of your debt relief options.

Debt consolidation loans could do more harm than good.

Debt consolidation loans could do more harm than good.

Comparing the Advantages & Disadvantages of Debt Consolidation Loans

Despite how confusing it seems, debt consolidation is actually pretty simple to understand. Debt consolidation is essentially the act or process of joining a number of debts together into one. Typically, when you hear debt consolidation, it’s referring to debt consolidation loans. In this scenario, consumers borrow additional money to pay off the rest of their debts. Usually debt consolidation loans come from a home equity loan, credit line or personal loan. As with any debt solution, there are pros and cons. Therefore, here is a quick look at the advantages and disadvantages of debt consolidation loans.

Advantages of Debt Consolidation

  • Consolidated debt is a viable option for consumers who are struggling to keep up with multiple payments and multiple due dates.
  • You make one monthly payment with one interest rate.
  • Avoids risk of home equity loan and foreclosure if you face difficulty repaying the loan.
  • Your credit accounts are paid and accounts are left open and active.

Disadvantages of Debt Consolidation

  • Your credit history may cause your lender to offer variable and high interest rates for the debt consolidation loan.
  • There may be higher or additional fees with this type of loan.
  • While your credit accounts remain open, this may allow you the opportunity to fall back into bad spending habits.
  • You may not receive the financial education needed to change your habits to avoid future debt.

While debt consolidation can be a step in the right direction, there are disadvantages to debt consolidation loans. An alternative option to a consolidation loan is a DMP. A debt management program consolidates your bills without borrowing more money. In other words, you do not take out an additional loan to pay for your existing debts. When you enroll in a debt management program, a credit counselor at a non-profit credit counseling agency, like ACCC, will negotiate with your creditors to reduce interest rates, any outstanding late fees, and any over-limit fees. Do your research before committing to a debt consolidation loan or debt management program to find the best fit for you and your finances.

If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today. 


Michelle is a regular contributor to Talking Cents. She has taken several financial courses on debt management and is ready to circulate what she has learned from them as well as lessons from her own life- family to DIY projects to student loan debt.

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