Mozo guides

Pros & cons of a debt consolidation loan

woman comparing debt consolidation loans

If you’ve got multiple debts and are struggling to keep up, a debt consolidation loan can seem like a lifeline. Rolling all your debts into one can streamline your repayments and potentially reduce the amount of interest rate you pay overall. 

But as with any financial product, it’s crucial to weigh the pros and cons before jumping in. Here’s a look at some of the advantages and disadvantages of debt consolidation loans:

What is a debt consolidation loan?

A debt consolidation loan combines multiple debts (like credit card debt or loans) into one loan, so you have one regular loan repayment with one lender instead of managing multiple individual debts. That way, you’ll potentially pay less interest, plus managing your debt should become more straightforward.

Pros of a debt consolidation loan

Let's take a look at some of the potential pros of taking out a debt consolidation loan:

  • Streamlined repayments: Instead of juggling multiple debt payments, you’ll only need to make one monthly repayment, making it easier to manage your finances. 
  • Less interest: By combining multiple debts into one loan, you’ll only pay one interest rate for the lot versus one per individual debt. So you’ll likely save on interest over time, especially if you’re consolidating high-interest debts. Plus, debt consolidation loans typically have more competitive interest rates than most credit cards or personal loans.
  • Opportunity to improve credit score: Using a debt consolidation loan to pay off high-interest debts has the potential to positively impact your credit score because you’re reducing the number of individual debts you have and are demonstrating responsible financial behaviour.
  • Debt-free sooner: By consolidating your debts into one regular payment, you might be more likely to pay your debt off sooner than if you just made the minimum repayment amount on various debts. 

Cons of a debt consolidation loan

Here are some of the different cons to consider when taking out a debt consolidation loan:

  • Risk further debt: By consolidating your debts and possibly freeing up credit on your existing accounts, you might be tempted to take out new debt. To avoid this, try to understand why you’ve accumulated debt in the first place so you start making better financial decisions.
  • Fees: As with many other loans, debt consolidation loans can come with application fees, annual fees, early repayment fees and other charges. These costs can add up, so be sure to budget for them.
  • Impact on credit score: Every time you apply for a loan, it shows up on your credit report – which means your credit score could take a hit. This means that while consolidating debts has the potential to improve your credit score in the long run, applying for a new loan could lead to a temporary dip in your score. 
  • Risk losing assets: If you opt for a secured debt consolidation loan, you’ll need to put up an asset like a car or property as security against the loan. The downfall is that you could risk losing the asset if you default on the loan. 

Is a debt consolidation loan right for you?

Ultimately, it will depend on your individual circumstances and specific financial situation and needs. Make sure to look at all the pros and cons to determine whether a debt consolidation loan is right for you before applying for one. 

If you do decide that a debt consolidation loan is a good option for you, be sure to compare the different loan options available to help you find a better deal.

Compare Debt Consolidation loans - last updated 19 April 2024

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Rhianna Dews
Rhianna Dews
RG146
Senior Money Writer

Rhianna has a Master of Journalism and Communication from UNSW, and has contributed to several consumer publications including TechRadar, Simply Living Australia, Beauty News Australia, Beauty World News and Fashion Gone Rogue. With over eight years of experience helping consumers make the most of their money, and a background in creating content for brands including Foxtel and Vodafone, means she's always the first to know the latest consumer trends. Her focus is on millennial money motivation and helping Aussies make smart money moves in personal loans, credit cards and online shopping.