Christopher Liew: Pros and cons of debt consolidation loans if you're deep in debt

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Personal finance contributor Christopher Liew goes over the pros and cons of debt consolidation loans, and how to determine if this option makes sense for you if you're in debt. (Getty Images / Korawat Thatinchan)
Christopher Liew is a CFP®, CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.
If you're juggling multiple credit card balances, personal loans, or other high-interest debt, it can leave you feeling like you're paddling upstream and making minimal progress.
A debt consolidation loan combines all of those balances into a single loan, ideally with a lower interest rate, so you can focus on one predictable monthly payment. However, it's not a one-size-fits-all solution.
Consolidating debt comes with its own set of qualifications, costs, and potential drawbacks that need careful consideration. Here's a closer look at the pros and cons of debt consolidation loans, and how to determine if this option makes sense for your financial situation.
Benefits of a debt consolidation loan
Depending on your personal situation, a consolidation loan can ease the burden of debt and help you see the light at the end of the tunnel.
It can help you save on interest payments
Credit cards and personal loans often come with high, variable interest rates. If you've made some credit card spending mistakes, then you may be stuck with a high balance that's hard to make a dent in, especially if you're only making the minimum payment.
This is because a large portion of that minimum payment goes straight to monthly interest fees.
If you're able to qualify for a debt consolidation loan with a lower interest rate than what you're currently paying, then you could save a significant amount in interest over the life of the loan.
May improve your credit
Paying off multiple debts in full can reduce your credit utilization ratio, a key factor in your credit score. Consistently making on-time payments toward your consolidation loan can also help rebuild your credit history.
Simplifies your budget with one monthly payment
In May 2025, Equifax's Consumer Trends and Insights report revealed that 1.4 million Canadians missed at least one credit card payment in the first quarter of the year.
Although much of this could be due to consumers' lack of funds to make their payments, some missed payments may simply have been overlooked. When you're juggling multiple debts, have a busy life, and don't have auto-pay enabled, it's easy to lose track of the date and miss a payment.
Consolidating multiple debts into a single payment simplifies your budget, so you only have to worry about one payment date.
Drawbacks of debt consolidation loans
While a consolidation loan can simplify your life and help you save on interest, there are some drawbacks and qualifications to consider before applying.
Requires good credit or a co-signer
Most lenders require a decent credit score to approve a consolidation loan, especially if you're looking for a competitive rate to reduce your interest payments. If your score is on the lower side, you may need a co-signer with a good credit score and stable income.
You need stable income
Similar to getting approved for an auto loan, you'll need to show that you have steady income and the means of paying your debt back. Lenders may ask to see your previous year's tax return, along with pay stubs from previous months. If you're self-employed or have breaks in your income, this could make it more difficult to get approved.
Risk of falling back into debt
If you're consolidating credit card debt, you'll be able to pay off the balance on your cards all at once. For those with self-control and good spending habits, this is great.
However, if you're not careful, it can be easy to fall back into debt once your cards' available spending balance suddenly opens back up. This is especially true if you don't have any emergency savings and you're using your credit cards as a safety net to pay for unexpected expenses that you can't afford out of pocket.
Alternatives to a debt consolidation loan
If you're on the fence about applying for a debt consolidation loan, here are a few alternatives to consider that can help you get out of debt quicker.
Credit card balance transfer
If you have a good credit score and a history of making all of your payments on time, then you could apply for a new card and pay off high-interest debt with a balance transfer.
Many cards offer an introductory period (often up to a year) without interest or with a very low rate. By transferring your outstanding higher-interest card balance to the new low-interest card, you'll buy yourself time to pay down the debt without the high interest fees.
The key here is to really commit to making as high a payment as you can on the now-lower-interest debt, so you can pay the debt off in full before the introductory rate ends and the interest rate increases on the new card.
Payment plan negotiation
If you're in over your head, in between jobs, or experiencing financial hardship, some lenders and credit card companies may allow you to negotiate and offer you a low-interest grace period so you can catch up and pay down your principal quicker. You'll typically need to call and qualify for this, though, and it's not always guaranteed.
Borrowing from family or friends
I hesitate to recommend this, as borrowing from family and friends can create tension and break down relationships. However, if you have a friend or family member who's willing to help, you could try to ask them to help you out with a loan.
To sweeten the deal for them, offer to pay them back with interest (that's lower than your current rate) and agree to make set monthly payments on a specific date.
Is a debt consolidation loan right for me?
If you're unsure whether it's the right course of action, it may be worth consulting a financial advisor who can help you look over all of your finances and guide you on the right path. For some, a simple change of budget and finding ways to reduce overall spending to free up more funds to pay down debt may be an easier solution.
Generally speaking, though, a debt consolidation loan is an excellent way to get out of debt quicker and reduce the interest you'll pay in the long run. However, you will need to have decent credit and a stable income to qualify. You'll also need to commit to not getting back in debt once your credit balance is freed up.
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