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Is Debt Consolidation a Good Idea?

Are you behind on your bills? If so, you might be thinking about debt consolidation. This option may work for some people to help pay off debt. Debt consolidation loans are typically used for unsecured debts, for example personal loans, credit cards and student loans. Instead of dealing with multiple bills, you have the ability to manage one consolidated bill.

Debt Consolidation Types

Debt Consolidation Types
Debt Consolidation Type Pros Cons

Balance Transfer Card

Lower introductory interest rates

More funds towards principal balance

Fewer number of credit card payments

Generally high interest rates after introductory period

Balance transfer & annual fees could get expensive

Could hurt credit score if credit card balances are above 30% of credit limits

Unsecured Personal Loan

Generally fixed interest rate

No collateral requirements

Installment payments

Can be better for credit score by decreasing revolving credit limit used

Higher interest rates since there are no collateral requirements

Repayment terms are generally shorter due to the unsecured nature of the loan

Loan origination & other fees may apply

401(k) Loan

Lower interest rates

No minimum credit requirements or impact on credit score

Easy automatic payroll deductions for loan payments

No application requirements

No earned investment gains on borrowed funds for duration of the loan

Risk of requirement to repay entire balance within 60 days if employment ceases

Risk of early distribution penalties & tax liabilities if not repaid timely

Home Equity Loan

Lower interest rates

Interest is generally tax-deductible

Repayment terms are generally longer than unsecured loan options

Collateral requirements

Risk home foreclosure if loan is not repaid timely

Closing costs & other fees may apply

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