Will a debt consolidation loan be worth opening in 2025? Experts weigh in

Challenging economic conditions continue as we head into 2025. With the average American carrying nearly $8,000 in credit card debt and inflation cooling but still impacting daily expenses, many households are looking for effective ways to manage their growing financial burdens.

A debt consolidation loan offers a potential solution to high-rate credit card debt — but is now the right time to pursue one? We spoke with industry professionals about the advantages and drawbacks of debt consolidation in the new year. Here's what you should know.

Find out how to tackle your credit card debt here.

Will a debt consolidation loan be worth opening in 2025? Experts weigh in

"[Combining] your debts may get [you] a better overall interest rate than you had across your debts before," notes Dr. Annie Cole, founder and money coach at Money Essentials for Women. Still, this approach isn't right for everyone.

According to Kevin Shahnazari, founder and CEO of FinlyWealth, the best debt consolidation loan candidates meet the following criteria: 

• Have a total amount of debt between $10,000 and $50,000
• Have a credit score above 680
• Have a debt-to-income ratio below 45%
• Have a strong cash flow for payments

Below, we'll explore when consolidation makes sense in 2025 — and when you might want to consider alternatives.

Yes, a debt consolidation loan can be worth opening this year

With the Federal Reserve likely pausing rate cuts in early 2025 to evaluate holiday spending impacts, experts encourage considering debt consolidation sooner rather than later. The timing could be critical, as credit card rates are expected to remain high in the near future, despite recent Fed rate changes.

"Lenders are cautious about rates because of uncertainty around inflation and consumers' financial resiliency," explains Kyle Enright, president of lending at Achieve. With credit card interest rates averaging above 20%, consolidation loans often offer much lower rates for qualified borrowers.

The savings potential can be substantial. FinlyWealth's Shahnazari has seen clients significantly reduce their annual interest payments by consolidating multiple high-rate credit card debts into a single loan with a lower rate.

Learn more about your credit card debt relief options today.

When it may not make sense to open a debt consolidation loan

"[Debt consolidation] loans work poorly for borrowers with unstable income or credit scores below 640," warns Shahnazari. He notes that the fixed monthly payments can create too much risk for those with variable income. Credit counseling or debt management programs that don't require new credit approval may be better for these individuals.

Even if you qualify for a consolidation loan, the interest rate matters. 

"Check the interest rate they're offering you," Cole advises. "The new interest rate might be higher than [your current one] if you have a low credit score." 

It's also worth noting that the application process will trigger a credit inquiry. This may temporarily affect your credit score.

Finally, those facing serious financial hardship may not get enough relief from consolidation. 

"Debt resolution (settlement) may be more appropriate [if you're] having a hard time making minimum payments on your debts," suggests Enright.

Alternatives to consider if a debt consolidation loan isn't right for you

According to Enright, other debt relief services and methods exist if you don't qualify for or benefit from a debt consolidation loan:

• DIY debt payoff: First, create a solid budget. Then, use strategies such as the avalanche or snowball method to pay debts off.
• Balance transfer cards: Move high-interest debt to a card offering zero or low interest for up to 21 months. With this option, you must have good credit and a clear plan to pay off the balance before promotional rates expire.
• Debt management plans: Work with credit counseling firms to reduce your interest rates. Alternatively, negotiate directly with credit card companies if you have a strong payment history.
• Debt forgiveness: Negotiate with creditors to lower your principal balances due. It's unlikely you'll have all debt forgiven, but you can at least get relief if you're struggling with minimum payments due to financial hardship.
• Home equity options: Use a home equity loan or home equity line of credit (HELOC) to pay off high-interest debt if you own a home with sufficient equity. But carefully consider the new loan terms and your ability to make payments.

The bottom line

Your path to conquering debt in the new year should start with understanding your options. Speaking with several lenders will help you compare rates and terms, while a financial advisor can assess whether debt consolidation fits your situation.

Before deciding, Cole recommends making a complete list of your debts, including amounts and minimum monthly payments. "Ask your lenders if they can work out a lower payment plan or interest rate," she advises. Some creditors may be willing to help if you reach out before falling behind on payments.