Potential Consequences of Debt Consolidation

The average American has just under $52,000 in debt across a variety of accounts: mortgages, home equity lines of credit, vehicle loans, credit cards, student debts and miscellaneous personal loans. Keeping up with all these obligations each month can become stressful and expensive — not to mention the fact payments can slip through the cracks for even the most careful of borrowers.

Debt consolidation offers a way to simplify repayment on some of these loans — notably those of the unsecured variety, like medical bills, credit cards and high-interest personal loans. This strategy centers around taking out a debt consolidation loan to pay off those other balances. This allows borrowers to make just one monthly payment rather than many and can reduce the interest charges they pay if they qualify for lower rates.

There are some potential consequences of debt consolidation of which to be aware, though.

Underestimating the Costs of Consolidation

Consolidation is meant to save you money by reducing your interest charges, but assuming it will is a pitfall to avoid. Even rates that appear lower in percentage may not result in you actually paying less.

Why is this the case? Here are a few cautionary reminders from the Consumer Financial Protection Bureau:


  • Lenders may offer low “teaser rates” for a limited time that eventually jump back up, so check the terms carefully before signing up for a loan.



  • Loans can include origination fees, closing costs and other extra expenses on top of regular interest charges.



  • Your monthly payment may appear deceptively lower because it is spread out over a longer timeline, resulting in you actually paying more over the life of the loan.


Use a debt consolidation calculator to factor in all the costs of doing business before you decide whether you should go ahead. Your credit score and income vs. debt levels will play a leading role in whether you’re able to qualify for a debt consolidation loan competitive enough to ultimately reduce your expenses.

Going Back into Debt Following Consolidation

Debt consolidation is nothing without a good budget behind it. Borrowers may feel less urgency to live within their means when they see many of their debts drop down to $0 — but it’s important to remember you’ve taken on brand new debt to pay off those old accounts.

Going back into debt in the aftermath of consolidation is unfortunately a common occurrence that leaves borrowers saddled with a loan and other debts to balance. As the experts at NerdWallet write, a potential negative consequence of consolidation is racking up even more debt “if you use newly available space on credit cards.” Not only does this cancel out the simplification offered by consolidation, but it can lead to credit score damage if you miss payments on any future obligations due to being overextended.

What to Expect After Getting a Consolidation Loan

Taking on a consolidation loan means committing to years of steady repayment, month in and month out, often for three to seven years. This means taking an honest look at your budget to ensure you have the funds to stick with it throughout the entire loan term. Missing payments on the consolidation loan will only serve to tarnish your credit score.

Successfully executing consolidation via a loan depends on adding up all the expenses ahead of time and weighing them against what you’d pay if you were to tackle your debt “manually.” What appears to be a good deal at first glance may actually result in costlier charges over time.

Just as there are potential benefits to consolidating, there are also potential consequences against which borrowers must remain vigilant to get the best results.

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