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Should You Consolidate Your Loans? Here’s What to Know

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May 13, 2020

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Defaulting on loans can have serious consequences – you could lose out on eligibility for future loans, your credit score will plummet, and you could even lose your car or house. Loan consolidation is a way to better manage your debt and make monthly payments a little easier.

But loan consolidation isn’t as simple as it seems. Let’s go over exactly what it is – and if it’s right for you.

What is loan consolidation?

Loan consolidation (also called debt consolidation) is taking out one big loan to pay off many smaller loans. 

Here’s the way it works: you (the borrower) take out one big loan from a new lender equal to the amount of all the debt you want to consolidate. This can be achieved in many different ways, including home equity loans, a credit card balance transfer, or just a large personal loan. By doing this, all you have to worry about is paying off one loan amount instead of keeping track of multiple debts.

How do I know if debt consolidation is right for me?

It all comes down to your individual debt situation. Ask yourself these questions:

• Do I have too many loans to keep track of?

Are my monthly payments too much for me to handle?

Are the interest rates I’m paying too high?

Is my debt overwhelming even when I keep a tight budget and close eye on my finances?

• Am I close to defaulting on my credit cards or student loans?

If you answered yes to these questions, you may benefit from consolidation.

What types of debt can you consolidate?

Loans are divided into two categories: secured and unsecured. You can consolidate both types, but not necessarily into a single loan all together.

“Secured” means a loan is backed by collateral that can be taken back if you don’t pay – like a car that can be repossessed for an unpaid auto loan. Some forms of secured debt include auto and title loans, mortgages, and home equity lines of credit (HELOCs).

“Unsecured” means there’s nothing a lender can take back if you default – for example, no one can take away the knowledge you gained in class even if you fail to pay back your student loans. Forms of unsecured loans also include credit card debt and medical bills.

Not all lenders will let you consolidate all types of loans with them. For example, student loans have to be processed through certain programs; they can’t be lumped in with your credit card bills or mortgage. You’ll have to ask a lender directly what they can help with. 

Pros & Cons

Debt consolidation loans have their benefits and drawbacks. Let’s go over some.


Easier management. It’s a lot simpler, mentally and financially, to keep track of one loan than many.

Lower monthly payment. You may not pay any less over time because of interest, but your monthly bills won’t be as high. This can really help if you’re struggling to afford basic necessities or you want to start putting away savings.

Helpful for high-interest loans. Private student loans and credit card debt often come with steep rates. Consolidating could bring them down.

Avoid blows to your credit score. When your monthly payments are lower and easier to handle, you’re less likely to miss a payment and damage your credit score.

Can help build your credit score. Some – not all – lenders will offer ways to obtain a debt consolidation loan with bad credit. If you’re struggling with bad credit, the best to increase it is by making your monthly payments on time – every time.


May not save much (if any) money in the long-term. Remember that lower monthly payment we mentioned? If it’s made up through higher interest rates, the ultimate sum you pay may not be any lower than if you didn’t consolidate loans. This varies from lender to lender – some offer lower interest rates than what you’re paying now.

Interest rates could increase over time. If you’re using a private lender, they could increase your interest rates over time, usually in relation to a financial index. (This isn’t a problem with a fixed rate lender.)

May lose certain benefits. Some original lenders offer forgiveness or deferment benefits. You may lose out on these if you consolidate.

Longer payment life loan. Lower interest rates and monthly payments both mean you’ll be paying off your consolidated loan for a longer period of time.

In general, people choose consolidation because it lets them pay off their debts for a lower amount each month at a lower interest rate. But not every consolidation lender is the same – it’s important to check their terms before applying.

Will loan consolidation hurt my credit?

Not necessarily. If you follow your loan terms, consolidation will actually help your credit score. Your credit score will only suffer if you fall deeper into debt and miss payments.

You should know that consolidating your loans isn’t like waving a magic wand. You still have to make regular payments, stay on top of your finances, and keep yourself from accumulating more debt. But consolidation can provide more breathing room and take some of the daily burden off your shoulders.

So, what should you do?

You may be wondering at the end of this, “Well, is it a good idea to consolidate my debt or not?”

There’s truly no one-size-fits-all answer. It all comes down to your individual financial circumstances. If you’ve decided that you should consolidate, then you have multiple options for doing so, including contacting a private lender or even using your home equity.

If you’re still unsure if loan consolidation is right for you, it never hurts to ask someone to help you figure it out. Our consolidation experts can help you understand your individual situation and figure out what course of action is best for you and your family. Contact us today at (813) 328-3632 to speak to an expert. 

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