Is Debt Consolidation a Good Idea?

If you’re in debt, you may have asked yourself: “Is debt consolidation a good idea?” In this post we’ll help you answer that question by explaining how a debt consolidation loan works, what the alternatives are, and describing when debt consolidation can help you and when it will not.

After all, being in debt is a no fun. You need all the information in order to make the best decision, so that you can turn your finances around as quickly and painlessly as possible.

Debt Consolidation Basics

So what is a debt consolidation loan? It’s a loan that allows you to pay off your current debts with a new loan that has different terms (usually from a different lender) than your current loans or credit cards.

The reason this can be helpful to people with a lot of debt is that it can solve three of the worst problems you face:

1) High interest rates
Some types of debt (particularly credit cards) can have extremely high interest rates – up to 25% or more. If you’re in that kind of situation, there’s a good chance your debt will grow faster than you can pay it off. Which is why a consolidation loan can often prove to be a better option: it may allow you to get a lower interest rate, which would save you money over the long-run.

2) High monthly payments
People with lots of debt also frequently struggle with high minimum payments – which are sometimes more than they can pay each month. That can lead to a domino effect where you miss payments, your interest rates get raised, and then you can’t stay above water. A consolidation loan can sometimes lower your monthly payment, and that can give you enough breathing room to get back on track.

3) Confusion because of too many bills
Another common obstacle to getting out of debt is when the sheer number of bills you receive makes it hard to even keep track of which payment is due on which date. Consolidation can help with this problem by reducing the number of bills you get down to a single one. That can make it easier to focus on getting out of debt.

So is debt consolidation a good idea? It depends on your situation. We’ll explain below. While there are some real benefits to debt consolidation, it’s extremely important that you do your homework and understand there’s a wide range of options when it comes to debt consolidation loans – some are good, some are bad, and some are downright predatory.

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Different Kinds of Debt Consolidation

The term debt consolidation encompasses a wide range of options. So how do you find the right one for you? Below, we’ll describe the various different ways you can consolidate your debt and explain the advantages and disadvantages of each particular option:

Debt Consolidation Company

There are many debt consolidation companies out there. As you would expect, they allow you to pay off all your debts by taking one loan from them, so that you will no longer owe any money to your previous creditors. Instead, you will owe the debt consolidation company an amount equal to the total sum of all your debts. And you will pay a monthly payment to them, which will go toward paying the principal of the loan as well as interest and fees. If you can get a low interest rate, this may be a good option.

However, you must be cautious when dealing with debt consolidation companies. Once you have agreed to the debt consolidation plan, you can’t go back, so it’s important to understand the potential consequences first. The fees and interest rates can end up being very high – especially if you have fair or poor credit. Since most people struggling with debt do not have excellent credit scores, they’ll have to pay high interest rates and fees which will burn a large percentage of their total cash flow each month. .

Furthermore, even if you get what seems like a good interest rate, there is still a significant risk involved in dealing with a debt consolidation company.  Your repayment plan might be much longer, which could cause you to pay more interest over the life of the loan even with a lower interest rate than what you had before. And if you miss a payment (or are late) you could face costly penalties and your interest rate could be increased. You also must be careful not to continue using more credit (with credit cards) after entering the debt consolidation program. Otherwise, you’ll end up with the same amount of debt – or more.

Home Equity Loan (or HELOC)

A home equity loan, or Home Equity Line of Credit (HELOC), allows you to borrow money against the value of your home. The size of these loans varies, but they can often be up to 75-80% of your home’s value. While home equity loans usually have fixed terms, meaning the amount of the loan, the interest rate, and the timetable for paying back the loan are all fixed, HELOCs on the other hand allow you to apply for a credit limit that you can draw upon at your convenience – but with no guarantee that your interest rates will stay the same.

While a home equity loan or HELOC can usually provide a lower interest rates than other loan types, there’s a catch. To understand why, consider the difference between your mortgage and your credit card. The mortgage is a “secured debt” and the credit card is “unsecured debt.” That means if you stop paying your credit card bill, the lender cannot automatically take any property (or collateral) from you as a penalty. On the other hand, when it comes to your mortgage, your house serves as collateral, so that if you were to stop paying your mortgage, the bank could take your house.

If you decide to consolidate your credit card debt with a home equity loan (or home equity line of credit), you’re essentially betting your house on the fact that you can pay back the loan. For some people, that’s no problem. But if you’re thinking about debt consolidation then you’ve probably already had some difficulty paying off your debts. If that’s the case, putting your house on the line may be too risky of an option for you.

Balance Transfer

You might have seen offers for “0% interest” credit card balance transfers. In theory, these can serve as a way to consolidate your debt onto one card, but be careful because the fine print on these offers sometimes exposes serious drawbacks. Here’s how it’s supposed to work: you initiate the balance transfer and pay a immediate transfer fee – usually between 2% and 5% of your total balance. For example, if you were transferring $10,000 to the new card you would pay $200 to $500. Then, you have a period of time (usually 6 months or 1 year) in which you will not accumulate interest on the balance.

During that time, you MUST continue making payments. If you miss a payment or even make a late payment, you will often lose the introductory 0% interest rate and will instead have to start paying interest immediately. Assuming that you make your payments each month during the introductory period, the usefulness of the balance transfer will depend on how much of your balance you can pay off before the interest rates kick in. To continue with the example above, let’s say you paid off $2,000 of the $10,000 balance during the introductory period. The benefit of doing so would depend on how high the interest rate was going to be after the introductory period was over (since you’d still have $8,000 on the card).

And we should mention the other risk associated with this option: it’s still a credit card! If  you’ve had trouble with overspending in the past, it might not make sense to solve your debt situation with another credit card – especially if the 0% introductory rate will tempt you to spend more.

Peer to Peer

More recently, a new option has been created that allows individuals to lend to each other. Peer-to-peer lending companies connect people who need a consolidation loan with people who can invest a small amount of money. The investor benefits by getting a good rate of return on their money, not to mention the satisfaction of helping someone get out of debt, and the borrower benefits by getting a consolidation loan for a lower interest rate than they’d get anywhere else (with loans ranging from $1,000 to $25,000).

Instead of filtering loans and investments through a massive institutional “middle man” as in a traditional bank, peer to peer loans are serviced by a peer-to-peer lending company that takes a small fee off the top and provides better than average rates to both investors and borrowers. These loans usually give you a 3-year or 5-year term to repay the loan, and more importantly, your interest rate is fixed the whole time. Why is that important? Well, with a fixed interest rate, a fixed amount, and a fixed repayment timeline, you can create a serious get-out-of-debt plan.

Is Debt Consolidation a Good Idea?

We realize there is a lot of information to consider. And each person’s financial situation is different. One of our principles at ReadyForZero is to make it easy for you to do the right thing for your long-term financial health. It’s why we always guide you to pay your highest interest debt account first (to save money and time). And it’s why we congratulate you whenever you pay off 25%, 50%, or 75% of your debt. But we want to find new ways to help and make this process easier for you.

Recently, we realized that many of you could benefit from some kind of debt consolidation loan to reduce your interest rate and help you pay off your debt faster. We researched what type of consolidation would be most helpful, and we were convinced that peer to peer loans have the potential to help the greatest number of our users. For that reason, we have been working with LendingClub to initiate a new savings platform in ReadyForZero (which we announced last week).

The way it works is that we set automatic triggers (such as your total debt load, interest rates, and paydown speed) to discern when a peer to peer loan can help you solve one of the problems mentioned at the beginning of this article:

1) High interest rates
2) High monthly payments
3) Too many bills

In the cases where a peer to peer loan can help you with one of these problems, we will present you with an opportunity to learn more and sign up for a loan with LendingClub. The entire process is automated and we never share your data with anyone.

Here’s an example of a situation where this might happen: let’s say you have three credit cards, with different balances and different interest rates:

Chase: $1,200 at 14% interest ($24 minimum per month)
Capitol One: $3,000 at 18% interest ($60 minimum)
Wells Fargo: $4,500 at 15% interest ($90 minimum)

In this scenario, you’d have three different monthly payments and if you paid $300 per month it would take you 3 years to get out of debt (costing $2,060 in interest payments).

Depending on your credit score, you might be able to get a consolidation loan from lending club that would look like this:

LendingClub Loan: $8,700 at 12% interest ($174 minimum or less)

In that case, you’d have just one payment to worry about, and assuming you paid 300 per month you would get out of debt in 2 years, 11 months, and would pay $1,504 in interest (saving you $556 compared to your current path)

That’s the kind of savings we envisioned when we initiated the savings platform. Of course, you should always consider your options carefully before applying for any kind of loan. And we’re always here to help. If you have questions – or if you’re still wondering, “is debt consolidation a good idea?” – feel free to post a comment below and we’ll do our best to answer it.

This article is part of our Credit Card Debt Resource Center and Debt Consolidation Resource Center.  If you’re looking for additional information about credit card debt or debt consolidation, be sure to pay a visit!

Image credit: Andres Rueda

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  • Croft&Gray

    Unfortunately, some people can’t control their use of credit card. One should keep in mind that credit cards should be used to help manage our finances better. If you notice that you’ve been having problems with using your credit card, might I suggest paying your credit card bills, refrain from using the card, or eventually have the card cut to stop you from more being tempted about buying more items.

    • Benjamin Feldman

      You are very right. Sometimes it’s wise to simply get rid of the card so that there is no more temptation.

  • April

    Can you decline a p2p loan if the interest rate is too high?

    • Benjamin Feldman

      I’m not sure I understand your question, but you should always be able to find out the interest rate before deciding whether to sign up for the loan or not.


    having multiple payday loans was a bad idea,i was so stressed out that i was losing hope hope that i can never pay my bills,and nothing will be left for me,but i heard of a debt consolidation,well i tried it and it works it was a good choice that i made so far…

    • Benjamin Feldman

      I’m glad it is working out for you. Best of luck!

  • Brent

    I recently lost my job and rely on my Wife’s income to float our bills. Our rent is half that income and when we pay our other debts and living expenses we have nothing left to buy food for our child and gas the vehicles for traveling to classes or interviews.
    My question is: would a consolidation be good in my situation in order to get some breathing room while I look for work and finish school? We have two CC two car loans (one has less than 24 months on loan and is worth more than we owe), and a plethora of medical bills on top of some private loans required to afford tuition beyond Pell grants and student aid? I am just not sure what to do at this point. I should also point out that we have already had to do bankruptcy and lost our house after the market collapse. To make matters worse I am just short of qualifying for unemployment, and she makes $100 over the threshold for State assistance on food and healthcare.

    • Benjamin Feldman

      Hi Brent, sorry to hear about these challenges you are having to face! The good news is you seem to have a good grasp on what you owe and you’re being proactive in looking for solutions. In order to reduce your monthly payments, you should try to get on an Income Based Repayment program, which is available for federal loans and some private loans. You should also ask to get your medical bills placed on a reasonable payment plan. And if you can, think about selling one of the cars (so you’ll have one less payment each month). It’s hard to know if consolidation would be good for you or not, but you might want to check out our resource centers for more information:
      And try signing up for ReadyForZero if you haven’t already, because it will help you organize all your debt in one place. (It’s free)

  • Janie Carrillo

    Recently my hours were cut from my job which made a big difference in my pay check. I was left with alot of bills. I have mortgage payment, loans, credit, cards, just to name a few.
    Do you think i can be helped to consalidate my bills?

    • Benjamin Feldman

      Hi Janie, sorry to hear about your hours being cut. I know that must be difficult. It’s hard for me to give you specific advice, since I don’t know all the details of you situation. Usually if you have a good credit score you can get a lower interest rate via a consolidation loan from a company like Lending Club or from a local credit union or bank. But you may need more help than that, if your bills are very unmanageable. Take a look at this article for more information: And don’t forget to check out our resource centers: Also consider talking to a financial counselor, and try using if you haven’t already.

  • A.M.

    I have just over $35,000 in debt (not including my mortgage $70,000). It breaks down to a credit card just over $7,500. A loan (consolidation effort gone wrong) just over $16,000 and a student loan for nearly $1,400. None of the interest rates are over 12%. I’m somewhat drowning with day to day bills. I’ve cut cable, got rid of the gym membership, and am now brown bagging my lunch. I’ve even picked up a second job.
    What I want to do is consolidate one more time, because I need to get some foundation work done (10,000) on my house. I got one of those pre-approved letters in the mail. Is consolidation right for me.

    • Benjamin Feldman

      Hi A.M., you might be able to benefit from consolidation, but it depends on a few factors. If you have a good credit score, you might be able to get a good deal on a consolidation loan through a company like Lending Club or Prosper. I’d also recommend considering whether the foundation work could wait until you’ve gotten more in control of your other debts. Let us know if you have any other questions. And if you haven’t tried ReadyForZero yet, it might help you visualize your debt situation:

  • Cailin

    Hi there,

    I have 4 credit cards and they’re all just about maxed out… the monthly payments that I can afford to make are JUST keeping me above water. It is a CONSTANT stress and worry in my life because I never have any money to do anything, it all goes towards my bills and I normally can’t afford basics (food and/or gas) once my payments have gone out. One of the credit cards has a $235 minimum monthly payment with a 24% interest rate, another has a 28% interest rate that basically cancels out every monthly payment I make.
    On top of the credit cards I have two student loans, car insurance, gas, and I need to pay for my work apprenticeship (anything I pay out for the apprenticeship is reimbursed, but I can’t even get started when I don’t have the money). I have considered debt consolidation before, I had even tried taking out a loan through my credit union but they weren’t able to help me since I have nothing to use as collateral. I’m struggling to get rid of this debt and it’s very depressing because I’m only 25 and want to get a house and new car, etc. I want to start my life but it’s not going to happen when every cent I make goes towards bills.

    • Benjamin Feldman

      Hi there, I’m really sorry to hear about these challenges. It must be so frustrating! Have you ever tried using LendingClub or Prosper for a peer-to-peer loan? These can be a helpful way of locking in a lower interest rate. There is also the possibility of using a 0% balance transfer offer. Of course, these options require having an average or above average credit score, which not everyone has. You could also consider asking for forbearance on your student loans. A few links that might be helpful to you:
      Let us know if we can help more!

  • Amanda

    Hello. My husband and I bought a house in April. The day it closed was the day we found out I had a large mass growing inside my liver and I had to have it removed. The medical bills are killing me and I dont feel like I am getting any footing with them. This month I had to do what I promised myself I would never do which is pay bills with my credit card. I have drained thousands out of my savings account to get out of debt, but I am just flat out, out of money. I calculated out after I pay my bills and have a little less that $400 remaining every month. But that doesnt include food, vehical maintance, and the other things you just plain have to pay for these days. I think i would have a better handle on these bills if I could make one large payment rather than 6 or seven closely spaced $80-$100 payments a month. What are your thoughts? and what might be a good option for my husband and I?

  • RW

    Hi! I am so glad you have this article. Here is our situation… I am hoping you can help shed light on what a good solution is… My husband will be graduating from college in August (YAY!) we have 5 children and have 3 credit cards with approximately $12000 debt on them. The interest rates vary from 9%-12%. Then we have $50000 in student loan debt and a mortgage with $11900 and a car loan for $12000. My husband has landed a job that is almost triple what we have been making. The hardest thing I am finding is making sure I have paid everybody on time and the right amount. My husband and I would very much love to be debt free and I was hoping with a debt consolidation loan we could make that timeline faster and less hectic. With five children life seems to be crazy all the time. What do you think would a debt consolidation loan sound like a good idea?

    • Benjamin Feldman

      Hi there, it sounds like you are on your way to becoming debt free, so congratulations! I have a couple suggestions. The first one is: sign up for ReadyForZero! It’s easy and free. You can go to and sign up right now.

      Here’s why I recommend ReadyForZero (besides the fact that I work here!). You can put all your accounts into one plan so that you’ll see it all in one place. You’ll see how much you owe, the different interest rates, the minimum payments… everything.

      Once you see the whole picture, then you can start deciding about debt consolidation. ReadyForZero can even refer you to reputable lenders for that. But the main question is whether it will (A) make your life easier and (B) save you money. It sounds like your life would be simpler with fewer accounts to worry about, which is one reason people do debt consolidation. However, keep in mind that your student loans and car loans will have lower interest rates than your credit cards. So you wouldn’t usually consolidate those loans with the credit cards. Whatever you do, start by getting those cards paid off first!

      Also, if you upgrade to ReadyForZero PLUS, you can actually make payments from our site directly to your lenders. This might help make things a lot easier!

      Hope this helps. And feel free to ask more questions if you have them.

  • R

    I have recently learned that over the past several years my father has been accruing credit card debt solely in my name. The credit card debt amounts to just over $35,000, and I am not sure if a debt consolidation or P2P loan is a good option. Minimum payments amount to around $1000 with interest around 15%. I am just trying to take care of the problem as quickly as possible and avoid paying more interest.

    • Benjamin Feldman

      Wow, I’m sorry to hear that – it must be extremely frustrating! First of all, I’m assuming you have a join credit card account with your father… is that correct? Otherwise, the debt that he accrued would not be yours. If that is the case, there is still the possibility that you could avoid the responsibility of paying off the debt he accrued. See this article for more information:

      If you do have to pay off the entire balance, a P2P loan could certainly help. We have worked with both LendingClub and Prosper in the past and they are both worth your time to research. If you can get a lower interest rate and monthly payments that work for you, then it would help you in the long run.

  • Frank

    Hey if you enter in to a debit consolidation loan does it look bad on your credit report?

    • Benjamin Feldman

      Hi Frank, in general a debt consolidation loan is looked at just like any other loan. However, please keep in mind that there are a lot of factors involved in credit reports and credit scores, so I couldn’t say for sure how it would affect you in any specific situation. For more on how credit reports and scores work, and how debt consolidation loans work, please see our resource centers:

  • RonJohn

    “you would get out of debt in 2 years, 11 months”

    So, you’d get out of debt 1 month sooner?

    • Benjamin Feldman

      In this example, yes. However, in other cases, you could get out of debt even sooner.

  • 57chevy

    That P2P sounds good! I have been considering debt consolidation. I have 3 cards that are maxed and I can’t seem to pay them down/off even paying more than my minimum payments. I have better interest rates now than I had previously, but I’m worried that as interest rates go up so will the cards’

    • Benjamin Feldman

      Great! Yeah, if you can get a peer to peer loan that reduces your interest rate significantly, it will save you a lot of money in the long run.

  • Robyn

    Hi. I’ve been wondering about debt consolidation recently. I have about $21,000 in credit card debt (3 cc’s with interest rates ranging from 14-16%), $4500 left on my car loan (with less than 2 years to pay and I owe less than the car is worth), 2 student loans (though only 1 of which I would like to pay off as soon as possible because my parents have been cosigned on it for some time now. That loan has $1500 left on it.), and my house is in desperate need of some sewer work. That could cost anywhere from $200-$7000, depending on whether or not the line needs to be replaced. I have an FHA loan on my house and I currently owe about $12,000 less than it is worth

    • Robyn

      Oh yeah…and I have good credit…742. Would be peer-to-peer loan be a good idea for me?

      • Benjamin Feldman

        Hi Robyn, I think a peer-to-peer loan might be a good fit for you. With your credit score, I suspect you could qualify for lower interest rates than what you’re currently paying. If you look in the middle of this post (above), there is an ad for LendingClub, which is a company we partner with. You can click the button in that ad in order to see what kind of loan and interest rate you’d qualify for.

        Let me know if you have any questions! And I wish you luck with your continued progress paying off debt.

  • Lyndy

    I have a fairly low amount of debt compared to most people out there but I am having trouble prioritizing my debt with my monthly bills. I have a credit card with a $683 balance (min payment is $25, I’ve been trying to pay $50 each time, and I didn’t get a new card when the last one expired so I don’t use it), student loan which is $5,828 (which I made one payment on a year ago), a medical payment of $309 that is on my credit report, as well as other medical bills that are at least at $3,000-$3,500 that I’d have to get a more comprehensive report to find out what all is there, and I have more expenses that I need to pay that I don’t have the money for like dental work, more health issues, car repairs, and monthly bills. I’d like to consolidate everything I can but I am worried I don’t have enough debt to qualify for consolidation AND my credit score is too low: 600. In addition to consolidation I probably need some other service or help with just organizing all of my finances. If you have any suggestions I greatly appreciate it. Trying to find out what all is out there. Thank you for this article, it has been very helpful.

    • Benjamin Feldman

      Hi Lyndy, I’m so glad this article has been helpful. It sounds like you would like to talk to an expert to help you get organized with all your debts and monthly bills. There are some non-profit credit counselors that can help you in this way. There are also tools, such as, that can help you organize all your debts in one place. (Let us know what you think of it!)

      The most important thing for you may be to look at which debt has the highest interest rate so you can get rid of that one first – maybe with a consolidation loan or maybe by paying it off before the others. Also, keep in mind that medical debt can sometimes be negotiated. Here are some links that might help you:

  • Jeremy

    Hi, I’ve been researching debt consolidation and peer to peer loans and am wondering if it would be right for my situation. To start with I have poor credit, just under 580. I do not have any credit card debt but I do have two very high interest rate car loans that total just over $9000. ($600/mth payment) I have about $2000 of medical bills that are in collections on my credit report. Unfortunately I am so strapped each month that I do not have the means to pay off these medical bills which are holding my credit down. We have already negotiated with the collection agencies and can’t get the payments any lower. My thinking is to take out some kind of loan to pay these medical bills off and my cars and have one payment where the interest rate would possibly be lower. I am not even sure if I could get a loan but if I could, would this be a good idea? Do you know of any institution that would do a $11,000 loan to someone with my credit score?

    • Benjamin Feldman

      Hi Jeremy, based on what I’ve seen from most peer to peer lenders, your score must be in the mid-600′s to qualify for a peer to peer loan. Unfortunately, with a score of 580 you probably won’t be able to qualify. However, it may be that once you’ve paid down a little more debt your score will rise and you’ll be eligible at that point. Let us know if you have any other questions!

  • Trey

    Good afternoon,
    I have a few concerns when it comes to consolidating our debt. I agree with what you have said with everyone’s situation is different. As for my situation my wife an I have a few loans an some doctor bills that add up to around 145,000. Our loans consist of rv payment and 3 vehicle payments. We are discussing consolidating all our payments to just one simple payment a month. We have a few concerns as to what would be best to situation to handle this. Any advise would be greatly appreciated. Thank you

    • Benjamin Feldman

      Hi Trey, there are a lot of factors to consider – especially since you have medical bills and auto loans. For example, do your medical bills have interest or are they interest free? The answer to that will make a big difference in how you respond and what kind of plan you make. I’d advise you to seek professional advice from a financial counselor. They should be able to give you the kind of recommendations you need. In the meantime, you can try using ReadyForZero to get a big picture view of your debt: Good luck!

  • M_K

    I have $9,000 in credit card debit and was thinking of getting a debt consolidation loan. My credit score is in the high 600s. My problem in that with two jobs I’m still living pay check to paycheck and unable to get the debt any lower. I’m hoping that with just one loan I can pay it off faster and not have to worry about making payments to different cards. What are the steps I would need to take if this is a step I’m considering?

  • angel

    Hi im 16,000 in cc debt. Tried lending club. Would only approve me for 9,000. So I told them not sure if I can do it for that amount. I wanted the full amount to pay off all my cards. My next step is to try my credit union but im getting discouraged and not sure what to do.

  • K

    We owe 35

  • K

    We owe 35,000 in credit card debt on various credit cards. We have a mortgage that we owe 179,000 at 5.5%. Our house appraised at 230,000. Should we refinance and take 20,000 to pay some of the credit card debt off? We have an atv to sell and a tax refund coming so when all is said and done we will have 3800 left in credit card debt. My husband is a w-4 contractor working 40 hrs a week at 70 an hour. Or should we try one of those peer to peer lenders?