Should You Look at Debt Consolidation?

Filed Under Debt and Debt Relief

Debt consolidation is the term used for a particular fiscal “move” that gathers up all of your separate debts (like credit card debt, revolving charge debt, car loan debt, etc.) and transforms them into one single debt. Mechanically, you replace a bunch of independent debts with one larger one. There are lots of financial institutions that have these sorts of products too. They’re commonly referred to as debt consolidation loans.

You basically take out a loan for the expressed purpose of paying off all the other little and large debts that you have. You pay them off one-by-one and then instead of writing several checks a month to different lenders, you write one check a month to your debt consolidation lender. It sounds like a good deal doesn’t it?

Of course, not everything that sounds good is good. However, in this case it goes both ways. Let me explain.

A debt consolidation loan can be a good thing in that it allow you to simplify your life and maybe take a breath. Instead of tracking a bunch of bills and balances, you only track one. And since simpler is usually better, this is a good thing.

Consolidating your debt can also save you money – at least on a cash-flow basis during the month. That’s because in many cases the new loan will have an interest rate that’s lower than the “blended” rate of all your previous debts. It may also have a lower payment than your previous combined payments. And since less money out the door means more money in your pocket each month, this is a good thing too.

But then there’s the other side of the argument to consider.

Many consolidation loans, especially the unsecured debt consolidation variety, achieve those lower monthly payments and lower interest rates because they lengthen out the loan. So you end up paying years longer than you would have with your individual loans. Years longer doesn’t seem like a good thing to me.

And the real issue with debt consolidation is that while bundling up the debt into a single package can bring some immediate relief, it does nothing for the underlying behavior that got you there in the first place – your spending habits.

If you don’t aggressively, and I do mean aggressively, attack and change your spending habits, especially your credit card purchasing habits, you’ll squander the breathing room the debt consolidation program gives you. You’ll do that by spending first a little more than you should and then more and more until you find yourself with a series of other debts as well as the consolidation loan.

So yes, debt consolidation programs can work but you need to also make some changes. Your best bet is to make those changes first, before you get that consolidation loan and not try to make them after. Try to get your spending under control by using a prepaid debit card. Set up an automatic savings amount from your paycheck. If you can get your spending and saving under control then debt consolidation services might just work for you.

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