Should I Consolidate My Debt? Understanding the Benefits

Debt consolidation offers a pathway out of excessive borrowing and long-term indebtedness.

Debt consolidation offers a pathway out of excessive borrowing and long-term indebtedness. It provides a mechanism to achieve long-term financial stability by replacing high-interest, short-term debts with a single, longer-term loan—ideally at a lower interest rate.

Consolidating your debts can help you build a better future, but it takes planning and commitment. In this blog, we consider some of the benefits of consolidating your debts, and when you should consider doing so.

The Long View: Should I Consolidate My Debt?

High-interest debt is easy to rack up and hard to pay off. If you’ve accumulated significant debt on your credit card, have outstanding medical bills, large payday loans, or have too much store credit, you may find yourself battling to make more than the minimum payments due, you could be juggling multiple payments and be struggling to make ends meet.

If you’re ready to take control of unsustainable borrowing, debt consolidation offers a simple, structured way to pay off what you owe over time, so you can achieve financial stability and begin to save for a better future. Read on to learn more.

What is Debt Consolidation?

Debt consolidation means merging several outstanding debts into a single loan in order to reduce your monthly debt burden and/or reduce the interest you will pay over time. Debt consolidation aims to make paying off your debt more achievable so you can focus on long-term financial success.

How Does Debt Consolidation Work?

You consolidate debt by taking out one new loan and using this money to pay off several outstanding loan balances. 

By doing this, you substitute the unpredictability of paying several short-term debts—often with varying balances and due dates—with one unchanging payment on a single loan that you pay down over a longer period, often 10 years or more, depending on your debt. 

To make this work it’s important that your consolidated loan has a lower interest rate. You’ll still pay a lot in interest over the life of your loan, but it will be less than if you had continued to juggle your high-interest debt.

With careful planning, and by controlling your spending, you’ll also be able to save money for things that build long-term prosperity like a down payment on a house or a college education.

The most common way to consolidate debt is with a personal loan from a bank or credit union that you pay down with a fixed monthly payment over an agreed-upon time.

What Kind of Debt Can I Consolidate?

You can use the lump sum payout you receive from your personal loan to consolidate many types of debt including:

  • Credit card balances: Stop making minimum payments while your debt racks up
  • Medical bills: Make a long-term plan to pay off unavoidable medical costs
  • Store installment plans: No more accumulating interest on missed payments
  • Payday loans: Break out of the habit of borrowing ahead through your paycheck

Signs You Might Benefit From Debt Consolidation

How do you know if it is time to consolidate your debts? These warning signs should let you know if your borrowing is becoming unsustainable.

Making Minimum Payments on Cards

If you are regularly making only minimum payments on a significant credit card balance, then your debt will quickly outstrip your ability to pay.

Struggling to Keep Track of Payments

If you are struggling to keep tabs on what is due on each card you have and by what date, then you are unlikely to make any real progress on repaying your debts.

Borrowing to Pay Down Debt

Taking on more short-term debt to make payments on existing high-interest debt is a clear sign that you are caught in a debt trap.

You Owe More Than 40% of What You Earn

Having a debt-to-income (DTI) higher than 40% of your gross earnings (excluding a mortgage) is often flagged by lenders as a sign of unsustainable debt.

You Are Not Saving

If you are not putting aside any money for an emergency fund, retirement, or other long-term goals because you owe too much—then you are not planning for your future. 

You Are Feeling Overwhelmed by Debt

Above all, simply feeling that your debt is out of control should be a red flag that you need to make a plan. Your gut feeling will often be the first sign that your debt is not under control.

If any of these behaviors sound familiar, it’s time to take an honest look at your financial situation and think seriously about what debt consolidation has to offer.

Benefits of Debt Consolidation

It’s important to be clear about what debt consolidation can and cannot do. It is not a quick fix that will instantly wipe your debt slate clean. And, it is a step that will require careful planning and considerable discipline over a sustained period if you are to succeed.

Nonetheless, consolidating your high-interest borrowing into a fixed-rate personal lane allows you to:

  • Simplifying your monthly payments: You’ll be managing one fixed monthly payment instead of several varying ones.
  • Lower payments—not just for now, but from now on: Your monthly payment will be lower than your combined pre-consolidation payments and will be due at the same every month.
  • Lower your interest rate: Your consolidated loan should have a lower overall interest rate than the average on your high-interest debts.
  • Improve your credit score: By making consistent, on-time payments on your consolidated debt you not only pay off what you owe, but you also improve your credit score while you do it.
  • Build long-term financial stability: If you’re struggling with high-interest debt, consolidation is a key step to regaining control of your finances so you can thrive!

Things To Consider Before Consolidating Debt

There’s a lot to like about debt consolidation, but there are also some key concepts and important decisions you should be aware of before consolidating your debts.

Interest Rates

Talk to your bank or credit union about the interest you can expect on a consolidated loan. It should be a good deal lower than the average on your existing debt, but this ultimately depends on your credit score, the amount you are borrowing, and the other terms of your loan.

Loan Length

Committing to a longer-term loan can be difficult if you’re used to managing debt month to month. It could take you 10 years or more to pay off your consolidated loan if you have run up significant debts, but at least you will know upfront when you will be done making payments.

You will also pay significantly more when you add in the interest you will pay over the life of this new loan. While that may seem unfair, remember that it allows you to pay less each month, so you can begin to set aside money for savings and other important needs.


There are also usually costs associated with taking out a loan for consolidating debt. You’ll typically pay a loan origination fee and other charges associated with assessing and underwriting your loan. Loan costs are sometimes paid separately at signing but are also often rolled into your loan payments.

Credit Scores

While turning high-interest, short-term debt into longer-term debt and paying it down month-by-month will ultimately benefit your credit score and it might initially lead to a drop in your score. This is because consolidating your credit into a long-term loan can affect both your credit utilization ratio (the amount of available credit you are using relevant to the total amount of credit you have) and your DTI.

Your scores will improve over time as you reduce both these ratios. You can limit the impact by keeping cards open once you have paid off your balances to preserve your overall debt limit while keeping your credit history as long as possible.

Avoiding Further Debt

Consolidating your debts will do nothing if you do not change your financial habits. If you continue to rack up new debts after consolidating your existing loans then you will need to maintain extra payments on these while continuing to pay down your long-term loan.

Taking Control of Your Spending

As important as consolidating your debts is, your commitment to taking control of your spending is equally if not more important. Putting together a realistic budget can help you predict and manage your spending, but you need to be willing to change the habits that got you into trouble in the first place if your consolidation is to work.

The following table compares some of the major pros and cons of debt consolidation.

Debt Consolidation Pros and Cons
Pros Cons
Simplify finances—Replace multiple debts with a single, fixed monthly payment. Loan costs—Origination fees, closing costs, etc. could add to the overall cost of your debt.
Lower interest rates—You’ll secure a lower average interest rate across your debts. Longer payment terms—You may pay less each month, but more in interest over time.
Fixed payment schedule—You know upfront what you owe and when you will be debt-free. Requires discipline—Unless you are careful, there’s a risk of falling back into debt.
Better credit score—Regular, on-time payments can improve your credit score. Lower credit score in the short term—Your credit score may dip in the short term.
Free up cash—By reducing your overall monthly payments, you free up cash to save or spend. Not for everyone—Debt consolidation might not work for you or your debt situation.

Is Consolidating Debt For You?

Debt consolidation is a tried and true way to escape high-interest, short-term debt, but it involves a commitment to take care of your finances over the long term. You will need to be prepared to make loan repayments on time and control your spending carefully for several years to come.

Remember, the goal is not just to consolidate your debts but to pave the way toward long-term financial stability and freedom.

If you’re tired of the stress and worry that comes with out-of-control spending and debt combined with the inability to plan for the future, then you may be ready to consider consolidating your debts. Be sure to weigh the benefits we have highlighted with the realities of having to control your spending, making loan repayments, and avoiding future debt.

Consolidation affects many aspects of your personal finances. If you are unsure your debt situation is serious enough to require consolidation, or the costs of taking out a loan might make your long-term loan uneconomical, or you have any other questions related to loan consolidation—be sure to talk to a trusted financial advisor about whether this is the right option for you.

How Foothill Credit Union Can Help

At Foothill Credit Union, we know that as a local financial cooperative, our success is built on partnerships with our members.

That means we offer great financial advice when you need it, so you can take control of your short-term debt which could be prohibiting you from reaching your long-term goals. And it means offering great products, like our flexible, affordable personal loans, to help you get there.

To qualify for one of our personal loans you will need a Foothill CU membership, a steady job, and a reasonably good credit history.

We offer loans up to $100,000 with:

  • Competitive interest rates
  • Convenient online application
  • Up to 60 months to repay
  • Easy automatic payments through our Online Banking service.

Our Signature Personal Loans are a convenient and popular way to get a grip on credit card balances or other stubborn debt. Contact us today to find out more or click below to get started.

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