Debt can cause stress and interfere with a person’s ability to meet short and long-term financial goals. A debt consolidation loan can help. Such a loan may simplify the debt payoff process and potentially save money. Fortunately, installment loans – which are typically unsecured and offered by banks, credit unions, and online lenders – can be consolidated.

How debt consolidation works

With a debt consolidation loan several debts are rolled into one, easy-to-manage payment. This type of loan eliminates the need to manage different payments, interest rates, payment dates, and payback periods. While several debt consolidation strategies are available, a debt consolidation loan is one of the most popular options.

When taking out a debt consolidation loan, a personal loan is used to combine multiple debts, ideally with a lower interest rate and more favorable terms. Often, the borrower will receive a lump sum to pay off their debts and will begin making just a single monthly payment on the new loan. However, in some cases, lenders will directly pay the borrower’s creditors.

Pros and cons of debt consolidation

Just like any financial strategy, debt consolidation comes with pros and cons, including:

Pros

The benefits of debt consolidation are:

• Paying one bill: Since the borrower only makes one monthly payment the process is simpler.
• May save money on interest: If existing debts have high-interest rates, consolidating them to one loan with a lower interest rate may save money over time.
• Possibility of lower monthly payments: With a debt consolidation loan featuring a lower interest rate, the borrower may be able to reduce their monthly payments but may end up with a longer repayment term. This means that while the short-term benefit means paying less each month, the borrower will end up paying more interest if the term of the loan is longer than the original loan terms were.
• May repay debt faster: Paying a single bill with a lower interest rate may allow the borrower to become debt-free more quickly than if they were to keep their multiple debt payments.

Cons

The drawbacks of debt consolidation are:

• Potential fees: Some lenders charge an origination fee to take out a debt consolidation loan. Others may impose a prepayment penalty if the debt is paid off early.
• Will not solve a spending problem: While debt consolidation can be a helpful strategy to alleviate current debt, it won’t help someone control their spending and stay out of debt.
• Possibly worsen debt load: Missed or late payments can lead a borrower further into debt.

Debt consolidation vs. other ways to manage debt

Here are some other options for managing debt:

Debt Avalanche and Debt Snowball

With the debt avalanche strategy, a person pays off their debts with the highest interest rates first so they can save the most money in interest over time.

Using the debt snowball strategy, the person pays off their smallest debt first and applies the payments they used toward that debt to pay for the next smallest debt. This strategy can help build momentum and increase motivation.

Balance Transfer Credit Cards

With a balance transfer credit card, a person can take their high-interest credit card balances and transfer them to a different credit card featuring a lower interest rate. Typically, this method of managing credit card debt is efficient because only a single payment is needed rather than separate payments to different credit card issuers at different times during every month.

Credit Counseling

Credit counseling involves choosing a credit counselor who can design an affordable monthly payment plan for the individual client. A credit counselor may be able to negotiate lower interest rates and credit counseling may protect the client from aggressive debt collectors and falling into delinquency.

The Bottom Line

Debt consolidation can take the hassle out of making regular debt payments on installment loans.  Other debt payoff strategies include debt snowballing, debt avalanche, balance transfer credit cards, and credit counseling.

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