If you’re like the 300 million other Americans drowning in debt, know that you aren’t alone and that there are ways out of it, even when it seems impossible.

Debt consolidation is a way to get out of debt. When you bring all your debts together into one loan, you consolidate it. Usually, you do this with a home equity loan, 0% APR balance transfer credit card, or personal loan.

Once you pay the debt off with the proceeds of the new loan, you have one loan payment and (hopefully) a lower interest rate. This debt consolidation method helps you stay on track with your payments and get out of debt faster.

But is it worth it?

When Debt Consolidation Makes Sense

Debt consolidation makes sense in many cases, but not all. 

Before you consolidate, determine the cost/savings. All loans have interest costs and sometimes closing costs. Determine the total cost of the loan and compare it to what you’d save by consolidating.

For example, if you can get a home equity loan with a 3% APR and you pay 19.99% on your credit card debt – it makes sense to consolidate unless the closing costs are very high on the home equity loan (they usually aren’t).

Debt consolidation may also make you more organized. If it eliminates late payments and late fees, it may make sense to do it even if the rates are the same or the savings aren’t immense. Late fees take away from the chance to save in other areas, including your retirement. If one loan is easier for you to manage – do it.

When Debt Consolidation Doesn’t Make Sense

Sometimes it doesn’t make sense to consolidate debt. Here’s why.

If the new debt, say a personal loan or even home equity loan has a variable interest rate, you may not save as much as you thought. You can’t predict the interest rate, so how will you know the savings?

If you only qualify for a variable interest rate loan, consider other options to get yourself out of debt.

It also doesn’t make sense if the closing costs are so high that it takes away from the savings. For example, if a debt consolidation loan saves you $200 a month, but the closing costs are $5,000, you wouldn’t realize any savings for 25 months. You’d have to decide if it’s still worth it. Many personal loans and home equity loans charge origination points, which are a percentage of the loan amount. Pay close attention to those fees when deciding.

Should you Consolidate your Debt?

Look at the big picture. Is consolidating debt going to save you any money? Look at both the monthly savings and the savings overall. What makes it worth it to you?

If you’d only save a few hundred dollars overall, it may not be worth the time or headache. If, however, you can save a few thousand dollars, it may very well be worth the effort involved in consolidating your debt.

Rahul Iyer