Skip to main content
Advertiser Disclosure
We do receive compensation from some partners whose offers appear on this page. We have not reviewed all available products or offers. Compensation may impact the order in which offers appear on page, but our editorial opinions and ratings are not influenced by compensation.

The Ascent Logo The Ascent Logo - Blue circle with an A in it and the ascent a motley fool company to the right of that

  • Credit Cards
  • Banking
  • Brokerages
  • Loans
  • Mortgages
  • Knowledge
  • Latest Picks
  • Search Icon Click here to search

Credit Cards

Top Picks
  • Best of January 2021
  • Cash Back
  • Balance Transfer
  • Travel
  • 0% APR
  • Rewards
  • Bad Credit
Knowledge
  • Beginners Guide to Credit Cards
  • How to Rebuild Your Credit
  • Maximize Your Credit Card Rewards
  • Learn More About Credit Cards
Credit Card Tools
  • Compare Cards
Looking for a new credit card?

Explore the best credit cards in every category as of January 2021.

Get started!

Banking

Top Picks
  • Best Savings Accounts
  • Best Bank Accounts
  • Best Money Market Accounts
  • Best CDs
  • Best Checking Account Bonuses
Knowledge
  • Beginners Guide to Banking
  • Everything You Need to Know About Savings
  • Money Market Accounts Made Easy
  • Learn More About Banking
Looking for a place to park your cash?

Check out our top picks of the best online savings accounts for January 2021.

Get Started!

Brokerages

Top Picks
  • Best Brokers of January 2021
  • Best Online Brokers for Beginners
  • Best Options Brokers
  • Best IRA Accounts
  • Best Roth IRA Accounts
  • Best Robo Advisors
Knowledge
  • How to Open a Brokerage Account
  • Beginner's Guide to Brokerages
  • Learn More About Brokerage
Just getting started?

Explore our picks of the best brokerage accounts for beginners for January 2021.

Get Started!

Loans

Top Picks
  • Best Loans of January 2021
  • Best Personal Loans for Bad Credit
  • Best Loans for Debt Consolidation
  • Best Low-Interest Personal Loans
  • Best Personal Loans for Good Credit
  • Best Personal Loans for Fair Credit
Knowledge
  • Personal Loans Made Easy
  • Debt Consolidation Guide
  • How to Pay Off Debt
  • Learn More About Loans
Thinking about taking out a loan?

Before you apply for a personal loan, here's what you need to know.

Get Started!

Mortgages

Top Picks
  • Best Mortgage Lenders of January 2021
  • Best Mortgage Lenders for Poor Credit
  • Best Refinance Lenders
  • Best VA Mortgage Lenders
Knowledge
  • First Time Homebuyers Guide
  • Home Loans Made Easy
  • The Complete Guide to Refinancing
  • How to Get a Mortgage with Bad Credit
  • Learn More About Mortgages
Tools & Calculators
  • Mortgage Calculator
Compare Rates
  • Today's Mortgage Rates
  • Refinance Rates
  • 15-Year Mortgage Rates
  • 20-Year Mortgage Rates
  • 30-Year Mortgage Rates
  • Jumbo Mortgage Rates
  • VA Loan Rates
  • 5/1 ARM Rates
  • 7/1 ARM Rates
  • FHA Mortgage Rates

Knowledge

Knowledge Section
  • All Articles
  • Credit Card Articles
  • Banking Articles
  • Brokerage Articles
  • Personal Loan Articles
  • Mortgage Articles
  • Personal Finance Articles
Recent Articles
  • How My Costco Anywhere Visa Card Scores Me Major Cash Back on Essentials

    Credit Cards

    How My Costco Anywhere Visa Card Scores Me Major Cash Back on Essentials
  • 4 Signs It's Time Switch Brokerages in 2021

    Brokerages

    4 Signs It's Time Switch Brokerages in 2021
  • Weekly Mortgage News Roundup for Jan. 22, 2021

    Mortgages

    Weekly Mortgage News Roundup for Jan. 22, 2021
  • Stimulus Check Update: 7 Reasons a Third Stimulus Check Is Likely to Become a Reality

    Personal Finance

    Stimulus Check Update: 7 Reasons a Third Stimulus Check Is Likely to Become a Reality
  • The Ascent
  • Knowledge
  • Loans

Don't Use These 4 Loan Types for Debt Consolidation

by Christy Bieber | Dec. 5, 2019

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

Debt consolidation loans can often make debt repayment easier, but these four types of consolidation loans could make your financial situation much worse. 

Debt consolidation is, in many cases, a smart financial move. If you can get a consolidation loan that allows you to simplify the repayment process, it may seem like a no brainer that you should say yes to borrowing.

But the reality is that not all debt consolidation loans are good ones. In fact, there are four specific kinds of loans you should usually avoid when you're consolidating your debt. 

Someone signing loan paperwork and being handed money.

Image source: Getty Images

1. High interest loans

The goal of debt consolidation shouldn't just be to go from having many loans to having one. You should also make sure you lower the interest rate on your debt when you consolidate. Otherwise, you're just making payoff more expensive. 

Always compare the rate on the consolidation loan you're being offered with the rate you're paying on your current debt. If the rate is the same or below, then you should be good to go. But if the consolidation loan raises the rate, walk away. 

The Ascent's picks of the best personal loans

The Ascent's picks of the best personal loans

Looking for a personal loan but don't know where to start? The Ascent's picks of the best personal loans help you demystify the offers out there so you can pick the best one for your needs.

See the picks

Repayment can also become more costly if you lower the interest rate but also stretch out the time it takes to pay off your debt. Some consolidation loans simply make payoff appear more affordable with a lower monthly payment, but since you will be paying the loan for longer, it will cost you more in the long run.

2. Loans with high fees

It's not just a higher interest rate that could make a debt consolidation loan too costly to be worth it. High loan fees also make the cost of debt payoff more expensive and may mean consolidation isn't a good idea.  

Unfortunately, some unscrupulous lenders target people looking for consolidation loans and offer them financing that seems good on the surface but that comes with high fees. These fees could be origination or application fees. Or you may find the new loan has hefty prepayment penalties that will prevent you from paying off the loan ahead of schedule. 

Always look at the fine print with any loan offer to see exactly what fees you're being charged. If the fees negate any savings you'd get from consolidating, you're better off keeping your debt with your current creditors and avoiding these added costs. 

3. 401(k) loans

At first glance, borrowing from your 401(k) to repay debt could seem like a great idea. After all, you are borrowing from yourself and paying interest to yourself.

However, if you don't pay back the loan on time, that's where the problem comes as there could be serious consequences. You could be taxed on the money you withdrew and hit with a 10% penalty if you weren't yet 59 1/2 when you took the money out.

You don't only risk these big penalties by failing to follow your payment schedule, but also if your repayment obligations are accelerated because you have to leave your job. If you end up leaving your employer -- either voluntarily or involuntarily -- while you have a 401(k) loan, the borrowed funds have to be paid back by tax day. So if you can't pay back the loan by the due date of the tax return for the year you've left your job, you'll be hit with these big penalties.

The Ascent's picks for the best debt consolidation loans

Want to pay off debt faster? Check out our shortlist of the best personal loans for debt consolidation and cut your monthly payment with a lower rate.

Pay off debt faster

Unfortunately even if you do pay back your loan, by pulling your money out of your investments during the repayment process you could jeopardize your retirement savings as you'd miss out on market gains that would've otherwise resulted. 

4. Loans guaranteed by the equity in your home

Home equity loans, home equity lines of credit, and mortgage refinance loans can also serve as a source of financing to consolidate your debt. But just because you can borrow against your home to pay off what you owe doesn't mean you should -- even though it may be tempting to do so because loans guaranteed by your home often charge a low interest rate.

The problem is, in most cases, the debt you're paying off with a consolidation loan is unsecured debt. But when you take out a loan against your home, you're switching it to a secured loan. All of a sudden, your house is at risk of foreclosure if you can't pay back what you owe -- and that's a big risk to take. 

Stripping the equity out of your home could also leave you owing more than the home is worth and trap you in the house until the debt is paid down. This could become a big problem if you need to downsize or move. 

Be smart about the debt consolidation loan you take out

While these four types of loans aren't good for consolidating debt, there are other loans out there that could be great for helping you reduce your interest rate and make debt payoff easier and more affordable. Consider looking into a personal loan or balance transfer if you're interested in debt consolidation so you can find the financing that's right for you.

Our Picks of the Best Personal Loans for 2021

We've vetted the market to bring you our shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.

About the Author

Christy Bieber
Christy Bieber icon-button-linkedin-2x

Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.

Share This Page
Blue Facebook Icon Share this website with Facebook
Blue Twitter Icon Share this website with Twitter
Blue LinkedIn Icon Share this website with LinkedIn
Blue Mail Icon Share this website by email

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

Featured Offer

Logo for Upstart loans

1K-50K - Min. 580 Credit Score

Check Rate

Related Articles

Man holding cash image for Best Personal Loans for 2021

Best Personal Loans for 2021

Girl holding credit card image for Balance Transfer vs. Personal Loan: Which Should I Choose?

Balance Transfer vs. Personal Loan: Which Should I Choose?

cap one image for 3 Times When You Should Take Out a Personal Loan

3 Times When You Should Take Out a Personal Loan

Man sitting at a desk celebrating with a fist pump image for How to Get Approved for a Personal Loan

How to Get Approved for a Personal Loan

Featured Articles

Best Personal Loans for 2021

Balance Transfer vs. Personal Loan: Which Should I Choose?

3 Times When You Should Take Out a Personal Loan

How to Get Approved for a Personal Loan


We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

The Ascent Logo

The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.

btn_facebook-yellow btn_twitter-yellow btn_instagram-yellow

Copyright © 2018 - 2021 The Ascent. All rights reserved.

About The Ascent
About Us Contact Us Newsroom How We Make Money Editorial Integrity Ratings Methodology
Legal
Terms of Use Privacy Policy Accessibility Policy Terms and Conditions Copyright, Trademark and Patent Information
Learn
Credit Cards Banking Brokerage Loans Recent Articles

By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.

Back to The Motley Fool