Debt consolidation involves rolling multiple debts into a single monthly payment, ideally with an interest rate that saves you money over the life of the loan. This can simplify your debt repayment process and potentially lower the amount you owe in the long term. However, there can also be drawbacks worth considering.
Let’s look at how debt consolidation works, including pros and cons, and when it may make sense for you.
What is debt consolidation?
A debt consolidation loan is a personal loan that you use to pay off other debts. For example, you might use this type of loan to consolidate credit card debt into a single payment to simplify your personal finances.
When you combine your debts into a single debt consolidation loan, you only have to keep track of 1 monthly payment. If you qualify for a lower interest rate, this may also help you save money on interest over time, depending on the length of your repayment term.
Pros and cons of debt consolidation
Pros
- Only 1 monthly payment to keep track of
- May help you save on interest if you qualify for a lower interest rate than you have on your existing debts
- Often comes with a fixed interest rate and predictable monthly payments
- On-time payments can boost your credit score
Cons
- May come with fees
- You must meet credit requirements to qualify
- Missing payments can harm your credit score
Does debt consolidation hurt your credit score?
There are several ways a debt consolidation loan can affect your credit score:
- It adds a hard inquiry to your credit report, which can have a small, temporary impact on your credit score
- If you use a debt consolidation loan to pay off credit card debt, it can lower your credit utilization rate (the amount of available credit you’re using), which may boost your credit score.
- On-time payments can help your credit score, while missed payments can hurt it
When is debt consolidation a good idea?
Debt consolidation may be a good idea if you have high-interest debts and can qualify for a lower interest rate that ultimately saves you money over the loan term. Note that even if the interest rate is lower, depending on the repayment period and the loan fees, you may end up paying more overall.
Debt consolidation can also make sense if you are having trouble keeping track of multiple debts and want the convenience of 1 payment.
Another factor that may tip the scales is your credit score. When you apply for a debt consolidation loan, lenders will look at your creditworthiness, income and debt-to-income ratio when deciding whether to approve your application and, if so, what loan terms to offer. You may be in a good position for debt consolidation if all these factors are in good standing.
If you’re interested in applying for a debt consolidation loan, Citi has fee-free loans with competitive interest rates for qualified applicants. If you think you could benefit from a Citi Personal Loan for debt consolidation, you may apply online today.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
