Debt Consolidation Loans 101: Helpful or Harmful?

Debt consolidation loans often receive a bad rap from personal financial advisors as being scammy, pointless, and over-marketed. Defenders of debt consolidation loans typically respond with claims that consolidations allow consumers to have an easier target to hit, that they simplify the payment process, and that they’re useful to stay organized.

A careful analysis of the objective financial facts reveal that debt consolidations have both pros and cons, and whether they are justified depends on the consumer and financial situation in question.

What is a Debt Consolidation Loan?

A debt consolidation loan is simply when you take one loan in order to pay off multiple other loans. The interest rate can be both lower, the interest rate can be fixed — depending on the debt consolidation loan.


These loans are extremely popular for marketers, because they are applicable to such a large amount of consumers. Due to heavy marketing and strong-arm marketing tactics, many financial advisors respond to the cheesy marketing tactics by automatically dismissing debt consolidation.

Advantages of a Debt Consolidation Loan

Here are a few of the more common advantages of debt consolidations:

  • Simple Debt Repayment. Having just one loan to repay rather than multiple can make it easier for consumers to resolve their debts. It makes missing payments due to lack of organization much less likely, and can clear up stress related to multiple bills. In other words, debt consolidations can make getting out of debt easier.
  • Lower Interest Rates. Depending the contract one signs with the debt consolidation company, the interest rates can be much lower than the original interest rates. This means the same amount of monthly payments can get a lot more debt paid off in the long run. In other words, debt consolidation can make getting out of debt quicker.
  • Fixed Interest Rates. Depending on the contract one signs with the debt consolidation company, the interest rates can be fixed — something a lot of unsecured debt doesn’t offer. This can add certainty to one’s finances.

Disadvantages of a Debt Consolidation Loan

Here are some of the more common objections to debt consolidation loans:

  • Not Paying Debt. A debt consolidation loan doesn’t actively pay off extra debt. If someone has a debt problem and a spending problem, then a debt consolidation loan alone won’t fix the problem. Getting out of debt requires a debt consolidation loan, plus active lifestyle changes.
  • Incomplete Fix. As discussed immediately above, a debt consolidation is simply incomplete. It’s not a complete debt solution — it’s just a debt step. Taken with other steps, it can be helpful; without other debt reduction steps, it can slow you down.
  • Increased Risk. For debt consolidation loans that include a home equity loan, you could lose your house if you default. The dangers here are obvious — it takes a worst-case scenario, and makes it even worse.

Two Off-Beat Ways to Consolidate Debt

Rather than getting a traditional loan to pay off multiple loans, you can also consolidate your debt with these two off-beat methods:

  • 0% Credit Cards. A low-interest credit card can be an option for consolidating debt through credit card transfers. The risk is in a missed payment, or through the low-interest rate being a short-term ordeal. Read the fine print, and calculate your risks.
  • Peer Lending. P2P lending platforms like and allow you to ask for loans from other consumers — this often means you can decrease your interest rate by skipping the big banks and large financial institutions.

A debt consolidation not mixed with lifestyle changes can be financially deadly and harmful. But mixed with lifestyle changes such as decreased spending, a debt consolidation loan can help you get out of debt faster, with more consistent rates, in a more efficient manner.

Talk to your financial advisor, do your homework, and focus on the objective financial facts.