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Financial Planning
December 1, 2021

Why loans don’t always work for debt consolidation

Debt consolidation loans are a common method for paying off debts, but they aren’t for everyone.

Every day, people turn to consolidation loans to get out from under growing or overwhelming debt. Approximately 77 percent of all households have debt, with the average consumer carrying a balance of over $90,000, including credit cards, car loans, student loans and other debts. 

Debt consolidation is a common solution that can simplify re-payments and lower costs. But before signing up, let’s look at the pros and cons and consider a few alternatives. 

What is debt consolidation?

Debt consolidation combines multiple debts into a single loan, rolling multiple debt payments into one monthly loan payment at a lower interest rate. 

Many forms of debt can be consolidated -- credit card balances, auto loans, student loans, a home equity line of credit, and others. You don’t have to include all your debts. You can choose which debts to consolidate, and both secured and unsecured debts are typically eligible. 

Debt consolidation loans typically provide a lump sum that you use to pay off other debts,

quickly freeing up your available credit, simplifying monthly bills and often lowering interest charges.

The pros and cons of debt consolidation loans

There are pros and cons associated with debt consolidation loans, and they aren’t always the right choice for everyone. The benefits include the following:

  • Financial streamlining: Reducing the number of bills you pay each month makes it easier to avoid missing payments and stay organized.
  • Fixed, predictable payments: Most consolidation loans provide a repayment schedule with fixed, predictable payments each month, making budgeting much easier.
  • Lower interest rate: If you have good credit, the interest rate on your consolidation loan may be lower than the interest rate on your individual debts. 
  • Reduced monthly payment: A lower interest rate and reduced fees can lower your monthly payments. The minimum monthly payment on your consolidation loan is also likely to be less than the combined minimum monthly payments of your individual debts. 
  • Improved credit score: In general, the more debts you pay off, the better your credit score. A consolidation loan pays off multiple debts all at once, leaving you with only a single debt balance. 

In contrast, drawbacks to debt consolidation loans include:

  • Added fees: Some consolidation loans may come with additional fees.
  • Increased interest rate: If you don’t have good credit, the interest rate on a consolidation loan may be higher than the interest rates on your individual debts.
  • Increased total cost: With consolidation loans, many people choose to make smaller monthly payments, which means it takes longer to pay off the debt and could result in paying more interest over the long term, even when the interest rate is lower. 
  • Uncorrected spending habits: Taking out a consolidation loan doesn’t address the spending habits that landed you in debt in the first place.

Weigh these pros and cons carefully before considering a debt consolidation loan. Note that if you do decide to apply, you may be denied a loan and will need to find another way to manage your debt.

Reasons you may be denied a debt consolidation loan

As with any loan, there are no guarantees. Lenders don’t like lending money if they aren’t reasonably sure you’ll pay it back. You may be denied a debt consolidation loan if your credit score is not high enough, your income is too low, your existing debts aren’t in good standing, or you simply have too much debt relative to your income. 

Alternatives to a debt consolidation loan

Other ways you can pay down your debt include the following:

  • Careful budgeting: Closely examine your current spending habits and stick to a budget that allows you to pay down existing debts.
  • A home equity loan or line of credit: Using your home as collateral may help you secure a consolidation loan you can use to pay off debts.
  • Bankruptcy: If you are in too deep and unable to pay your debts, filing for bankruptcy may be an option. However, bankruptcy can significantly negatively impact your credit for years to come.
  • Debt settlement: If you have debts in bad standing, you can try to negotiate a settlement with your creditor and get part of the debt forgiven. However, a negotiated settlement can negatively impact your credit score.
  • Credit counseling: A credit counselor can build a debt management plan, which acts on your behalf to negotiate debt settlements and helps you with budgeting. Debt management plans work similarly to consolidation loans in that your debts are consolidated under a single payment. However, instead of a loan, you’ll make a single monthly payment to the counselor’s agency, who then pays your individual creditors.

                                                     Benefits of using Bright as your personal finance app.

A better way to pay off debt with Bright 

Bright doesn’t offer debt consolidation loans, but we can help you get debt-free faster. Powered by MoneyScience™, Bright studies your finances and analyzes your debt, looking at APRs, balances and interest charges, then makes smart card payments for you, automatically. 

Week by week, Bright moves funds from your checking based on your goals and what you can afford, adjusting automatically as your finances shift. 

Bright also offers two other solutions, Bright Credit Builder and Bright Balance Transfers. They’re smart alternatives, with competitive rates and built-in automation. 

Bright Credit Builder is an easy and safe way to boost your credit score - with instant approval, no extra fees and no credit check required. Once you’re signed up, we’ll set up an interest-free, secured line of credit and use it to make automatic payments on your cards, building a positive payment history and lowering your credit utilization. Bright Credit Builder focuses on utilization and payment history because as they improve, your credit score goes up! 

Bright Balance Transfer offers a low-interest line of credit designed to pay off card debt fast while saving you from high interest charges. Once approved, Bright uses the funds from your Bright Balance Transfer to pay off your high-interest cards, moving those debts to our balance transfer program with its lower APR. Over the months ahead, Bright automates your new repayments, too, so you pay less in interest and it’s hassle-free. Bright Balance Transfers offers credit lines of up to $10,000 at APRs starting from 9.95%, depending on your eligibility.


If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your checking account and your cards, set a few goals and let Bright get to work. Once you sign up, you can apply for Bright Credit Builder or Bright Balance Transfer or use MoneyScience™ to pay off your cards fast.

Recommended Readings:

How does Bright boost my credit score?

What Is Moneyscience™ and how can you use It?

Pranay Chirla
Technical Content Writer
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