4 situations where a debt consolidation loan may not make sense

Woman sitting at a desk and looking through notesImage: Woman sitting at a desk and looking through notes

In a Nutshell

If you need to consolidate debt, a personal loan could be the ideal solution. But there are several situations where you may want to think twice. For example, if you can’t qualify for a lower interest rate or plan to continue using your credit cards after they’re paid off, you may want to consider other options, such as credit counseling or debt settlement.
Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our marketing partners don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.
Advertiser Disclosure

We think it's important for you to understand how we make money. It's pretty simple, actually. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.

Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.

Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.

Personal loans can be a great way to consolidate debt, but they aren’t always the best option.

A debt consolidation loan is a loan that allows you to use the borrowed funds to pay off other smaller debts, such as credit cards, medical debt or personal loans. This can leave you with just one monthly payment to make instead of many.

Simplifying your repayment process by having just one loan to pay can reduce your chances of missing a payment. And if you qualify for a consolidation loan with a lower interest rate than what you’re paying on your current debts, the total cost of repayment could be less.

Despite these potential benefits, personal loans for debt consolidation aren’t always the right answer. Here are four situations where you may want to consider alternatives.


1. When you can’t get a lower interest rate

If you’re able to pay off high-interest debt with a personal loan at a lower interest rate, you could save hundreds or even thousands of dollars in interest over the life of the loan.

But not everyone can qualify for a personal loan at a lower rate. When deciding whether to approve you for a loan and the interest rate they’ll charge, lenders look at several factors, including your credit history, income, expenses and debt. If you have less-than-stellar credit, the lender may charge higher interest rates.

If you can’t qualify for a personal loan with an interest rate that’s lower than the rate you’re paying on your current debt, it makes little sense to get a new loan. Paying down your debt that way would be more expensive in the long run.

The exception

One type of loan that tends to have lower interest rates than personal loans is auto loans. But paying off an auto loan with a debt consolidation loan may make sense if you can’t afford the monthly payments.

A debt consolidation loan could help you pay off your car loan and avoid a car repossession. Just remember that consolidating this kind of debt to a higher interest rate (even with lower monthly payments) will likely mean you’ll pay more in interest over time.

Likewise, if you’re struggling to make your monthly payments on other types of debt, transferring that debt to a longer-term loan could lower your payment. But again, you’ll probably end up paying more interest on a loan with a longer term.

2. When a promotional 0% APR balance transfer makes more sense

Even if you’re able to qualify for a personal loan with a low interest rate, a credit card with an introductory 0% interest rate on balance transfers could be a better option. With a balance transfer card, you can combine other credit card and loan debt onto one card and pay no interest on that balance transfer during the introductory period.

Before you formally apply for a balance transfer card though, here are some drawbacks to consider.

  • Your debt may exceed the card’s credit limit or the maximum transfer amount determined by the card issuer.
  • There may be restrictions on the types of debt you can transfer to the card.
  • Some cards charge a balance transfer fee (usually around 3% of the transferred balance), but you could also find cards that don’t charge that fee if you shop around.
  • The 0% promotional rate on a balance transfer card won’t last forever. In most cases, introductory offers range from around 12 to 21 months. Once the promotional rate expires, the interest rate will rise — and usually well above what you’d pay for a personal loan.

Be sure to read the fine print on your credit card agreement to see how high the interest rate could rise when your promotional rate expires. If you don’t think you’d be able pay off a transferred balance within the introductory period on the card and you can qualify for a personal loan at a lower rate, you may be better off locking in that low rate for the entire time you’re working on loan repayment.

3. When you plan to continue spending

Becoming debt-free is usually the goal of taking out a debt consolidation loan.

You can’t do that if you plan to continue using your credit cards after you pay them off with a debt consolidation loan. You could soon find yourself with a big personal loan to pay off and maxed-out credit cards — a bad financial situation to be in.

You can help avoid this fate by living on a budget for several months before getting a consolidation loan. Once you’re confident you can stick to the budget — and make monthly payments on a new consolidation loan — you can consider moving forward.

4. When you can’t afford the payments on a debt consolidation loan

While it may be tempting to streamline your debt, you should avoid a debt consolidation loan if you won’t be able to afford the monthly payment.

If you’re in debt so deep that even consolidation won’t make payments affordable, you may be better off exploring alternatives, like debt settlement, credit counseling or contacting your lender to work out a payment plan.

Debt settlement would involve working with your lender to pay off less than the total you owe. While it could damage your credit, it may be a solution when you’re in over your head. But there are plenty of downsides, so you should consider debt settlement carefully and be sure to do your research.

Another approach is credit counseling, which involves seeking out a counselor to work with you to improve your finances. You can find a local counseling agency through the National Federation of Credit Counseling website.

And it’s also worth contacting your lender directly to ask about lowering your interest rate or reducing your monthly minimum payments. They may not seem like much, but small changes like these could make your debt a little more manageable.


Bottom line

While debt consolidation loans can give you access to money you may need, you should only borrow when it’s affordable and makes financial sense. Before you apply for a debt consolidation loan (or any loan, for that matter), make sure you can afford the payments. Take the time to do your research and ensure there isn’t a cheaper way to borrow or other possible ways to reduce what you owe. Otherwise, you could end up even deeper in debt.


About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher… Read more.