Should You Consolidate Your Debt?

| February 6, 2019 | 0 Comments

debt consolidationIf you are wallowing in debt from credit cards, student loans, and medical bills, it probably seems that ads for debt consolidation companies are everywhere. At least you’re very aware of them.

They bombard you from every angle with promises to solve your problems, lower your interest rates, and eliminate your debt in one easy step.

Many of you ask TBM (The Budget Mom) if you should consider this method of debt consolidation as a way to help lower your interest as you are paying off these debts.

Well, that’s a really great question!

If making the minimum monthly payments on your debts isn’t helping you get out from under them, then SOMETHING has to change, right? You can’t keep living like this. But debt consolidation loans almost seem too good to be true. Are they?

Let’s address this topic, the pros and cons of debt consolidation, and what your options are so you can decide what will work best for you.

There’s More Than One Way to Get Out of Debt

The most effective way to get out of debt totally depends on your current circumstances.

An obvious, but often ignored way to get out of debt is to take on a temporary second job where all of the income goes straight to paying off your debts.

Granted, this makes your life much busier and more hectic for awhile. Still, the reality is that most people who choose this route feel less stress from working two jobs than they do from worrying about how they’re going to juggle their bills this month. This is a great option if you can swing it.

For many, the most realistic way to consolidate debt is to tackle it yourself by paying off the smallest of your loans first.

Once eliminated, the monthly payment for that small loan then goes toward the second smallest (in addition to the amount you are already paying on it). Once the second is paid off, you move up to the next one, continuing to combine payments until everything has been paid off.  This is called the Snowball Method, and is also a responsible option!

If you have low-interest debt, like school loans, or no-interest debts, like some medical bills, you should consider paying those off last.

Another possibility to keep in mind is transferring all of your balances to one credit card.

This is known as balance transfers.

This method can succeed at simplifying multiple debt payments and eliminating some stress. However, consolidating debt in this way still leaves you with a fairly high interest rate.

You need to pay close attention if you are thinking about transferring credit card balances. Some cards advertise temptingly low interest rates, but this is often just an introductory rate that only lasts for a short time before the rate increases.

You will also need to pay the amount transferred off before the introductory interest rate ends, or you could be subject to back interest on the entire amount transferred.

This options also leaves you open to the temptation of accruing more debt. In other words, with all your debt on one card and a zero balance on your other credit cards, it’s easy to start using the zero-balance cards when you want a little extra. Pretty soon you could find yourself in even worse circumstances. Really, this should only be a viable option for those with serious financial discipline.

Then, of course, there is a debt consolidation loan with a lending organization.

Consolidating your debt with a single loan just means you are restructuring your debt, much like filing for bankruptcy. Yes, you’ll have lower payments, but only because the term of your loan is extended for a much longer time period. This means you are hanging onto debt longer, when the goal should be to get rid of debt quicker!

You need to understand when you work with these consolidation companies there is no guarantee of a lower interest rate, despite what they promise. The interest rate is usually decided on by the lender and can vary based on your credit history and credit score. Even if you qualify for a lower rate, that rate may fluctuate. And trust me, it’s only going to get higher.

Let’s take a deeper look into what often happens when you consolidate your debt with a lending company.

Just What Is Debt Consolidation Anyway?

Debt consolidation is the refinancing of all your unsecured debts. Generally, all your loans and debts of this type are combined into one simplified monthly payment plan.

The result is a seemingly lower interest rate and a lower payment, so it’s easy to see why debt consolidation have such an appeal. They draw you in with the allure of exchanging multiple high-interest loans for one single monthly payment. More often than not, these loans from debt consolidations companies just don’t add up.

Let’s look at the math:

Currently, we’ll assume you have $25,000 of unsecured debt (Unsecured debts are things like credit cards, medical bills, and student loans. This does not include debts that have collateral like a mortgage or a vehicle loan.) Let’s say the interest rates on most of these unsecured debts range from 10% to 16% and your payments total more than $1200 a month.

At your current minimum payment plan, it will take you about two years to pay off these loans, and you will pay nearly $4,000 in total interest.

Now, let’s also assume a debt consolidation company will work with you to lower your interest rate to 10% (better than or equal to all your other loans, so that sounds good!) and they will set up your monthly payments at $775 (more than $425 less than you’re paying now!). They do this by combining all of your debts into one solitary loan.

Wow. This is great, right?

What They Don’t Tell You

Well, what they don’t always tell you up front is this: debt consolidation companies usually charge a 20-25% fee on your total loan. That’s huge. HUGE. So, what WAS going to take you 26 months and $3850 in interest is now going to take you double the time and cost you nearly twice as much – 50 months and $7,000 in interest/fees.

Your lower consolidated payment will actually cost you an additional two years and $3200 more in the long run.

Clearly, this is not a perfect solution. You have to realize that debt consolidations companies make this sound so appealing in their ads because they are in this to make big profits. They prey on desperate people and tempt you with one thing but deliver something very different.

After weighing all the pros and cons of a debt consolidation loan, if you still choose this route, at least make CERTAIN the interest rate is low enough to make a difference, and that the loan you get is enough to cover the entire balance of your existing debt.

The truth is, while they can make your monthly budget more manageable, they don’t really help you. They keep you in debt longer and cost you more money in the long run. This is one of the reasons debt companies accounted for 23% of all business complaints made to the Federal Trade Commission in the last year.

Make sure you understand all the fine print before you decide to take this route.

The Pros and Cons of Debt Consolidation Loans


  • Credit cards get paid off completely.
  • Interest rate CAN be lower.
  • Monthly payments will be less than they are now.
  • You will only have to deal with one single payment each month.
  • In extreme cases, these debt consolidation loans can keep you from having to file bankruptcy.


  • You will stay in debt much longer, maybe even double the time.
  • You will pay almost twice as much in interest and fees over the long haul.
  • Your interest rate can increase with time.
  • You are going into debt to pay off debt.
  • Your credit cards are still available to use, so your debt can continue to grow.
  • You have not taken any steps to discipline yourself or to change your spending habits.

Is Debt Settlement the Same as Debt Consolidation?

The short answer here is: NO. Debt settlement companies claim to negotiate with your creditors for a payoff price that is less than you actually owe. These companies charge fees on average of $2500 – some higher – for their services.

Often these debt settlement companies are scams. They will advise you to stop paying on your debts and make your payment to their company instead. In return, they promise to settle your debts. Don’t fall for this. They are often fraudulent businesses who take your money and leave you with all your original debt plus your additional late fees and interest. Avoid settlement companies completely.

Dealing with the Real Debt Problem

There are many ways we acquire debt and many reasons for it as well. Sometimes, even despite our best efforts, crises happen. You lose a job, have a medical emergency, or find yourself suddenly divorced.

For others, you are simply living beyond our means. The truth is, even after all the work to consolidate your debt and get it paid off, you’re likely to find yourself in debt again in the very near future.

So many have never been taught how to establish good habits for handling finances. Parent don’t often pass these along to their children. Schools and universities don’t require basic finance classes as part of their general education courses. Many don’t know where to find the tools to even help you get started.

You’ve never had to set a budget, much less live with one. You’ve not been taught the importance of paying for things with cash. You don’t have a clue how to spend less and save more or how to build wealth. And our culture of instant gratification is pressuring you to spend more, buy more on credit, and take on more debt than you can, or should, have.

Without these important basic financial skills, you are likely to find yourself constantly in debt. You won’t have any savings when crises happen. There won’t be college or retirement funds. There may never even be money for a downpayment on your own home. This is a very stressful way to exist.

Live Your Best Life

Have you seen the show Hoarders? If so, then you’ve felt the stress these people are under from living among all the trash and clutter.

Living with debt feels exactly like that. The trash and clutter is just mental instead of physical.

So, while it may seem tempting to just take out one consolidation loan to pay off all the clutter, all you are really doing is paying someone else to do what you can do on your own.

Finding a good financial advisor and taking control of your spending by creating a realistic budget are the first steps in moving toward a brighter future. Work to get the debt paid off, preferably without taking on more debt – a second job, paying off the loans from smallest to largest, responsible debt consolidation – whatever steps you think are the best route to get yourself out of debt.

While I never recommend using a debt consolidation company, by all means, if you need help with your debts, you should get it. There are financial advisors and debt repayment programs and credit counseling agencies that can help you negotiate lower interest rates or consolidate responsibly. They can also help you make a plan of attack so you can be in control of your situation.

You have the choice to declutter your finances, get out of debt, and make your life better from this point forward. It won’t be easy, but the thing is, once you begin, you will feel so much freedom!

How to do it remains up to you.

Note: The article originally appeared at The Budget Mom.


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Category: Personal Finance

About the Author ()

Hi there! I’m Kumiko, or just call me Miko. I was tired of living paycheck to paycheck and feeling hopeless. So I paid off $7,500 in credit card debt and became an Accredited Financial Counselor® I created The Budget Mom to share my knowledge and to keep me accountable as I strive to live a life I love on a budget that I can afford. Here you will find tips for saving more, spending less, and some ideas on how to make life a little bit easier.

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