September 28, 2021

What is Debt Consolidation?

Can debt consolidation help rid you of bad debt, safely? Home loan, car loan, student loan, credit cards, store credit, medical bills—all are common examples of high-dollar debt that the average American could have. Credit cards are some of the worst, usually bundled with inflexible repayment terms, penalties, fees and high interest rates that could have you hog-tied to your fat-cat credit card company for years.

If you owe money, you have debt. Millions of Americans, as many as a quarter, are in financial debt up to their eyeballs. When the going gets tough, debt consolidation products and services “promise” to fix your debt problems. Can they really make your debt more manageable?

Debt Consolidation: What It Is Not

At first glance it seems that debt consolidation products simply roll your loans or lines of credit into one neat product—a personal loan or home equity loan.  Voila! Done. Advertisements often give the impression that your debt may be reduced, or that you magically are relieved of much of your debt.

This simplification can lead to common and dangerous misconceptions about debt consolidation.

Technically, a debt consolidation loan replaces your other loans. The lender, be it a bank, a credit card company, or other type of financial company, pays off your loans and then writes you a new one. Your debt doesn’t disappear; it just gets moved around a bit. This new loan is then bundled with its own terms: fees, repayment term, interest rate, and more.

Dangers of Debt Consolidation

Debt consolidation is attractive to many people and for good reason. The common misconception is that a debt consolidation loan will wipe out or vastly reduce, the amount of money you owe to lenders. Guess what? Not true.

  • Debt consolidation will not reduce the money you owe.
  • Debt consolidation will not “get rid” of your debts.
  • It will not solve your poor spending habits.
  • Debt consolidation can cost you exponentially more in the long-term than the total original value of your loans.

At best, debt consolidation can:

  • Reduce the number of monthly payments you make each month. This doesn’t mean you’ll owe less.
  • Help reduce the amount of money you pay out each month. This also doesn’t mean you’ll owe less.

A debt consolidation product is good for lightening the load each month, but in turn you will end up paying out more, owing more, once all is said and done for your debt consolidation loan.

Solving Your Spending Issues

The risks? That debt consolidation only enables you to continue spending, racking up another mountain of debt. Most financial advisors suggest that if you must resort to a debt consolidation product or strategy, choose your lender wisely and use the product to your advantage. Consult a financial specialist for help reigning in your finances and getting your debt repaid for good.

Is Debt Consolidation Right For You?

It seems like every time you turn on the television or radio there is an advertisement about the many advantages of consolidating your debts. The gist of the advertisement is always the same, if you use the company to consolidate your debts, your life will be better. According to the advertisements, consolidating you debts is the only thing you need to do in order to live a happy life that is free of financial worry. What the advertisements don’t tell you is what debt consolidation really is, or if it is truly the right choice for you?

What consolidating your debts does is take two or more of your current debts, and combines them into one larger loan. Contrary to what the advertisements imply, the consolidation doesn’t necessarily make the loans smaller, what it does is eliminate the hassle of trying to remember which bill needs to get paid when. For some people, having the debts consolidated into one lump payment is the difference between paying the loan on time, or forgetting about it and acquiring a finance charge.

It is important to understand that having their debts consolidated into one large loan is not for everyone. There are some cases where it is a very good idea. There are also some cases where the consolidation actually led to some bigger financial problems.

The consolidation of debts is a very useful solution if you are currently struggling to pay off several high interest debts, such as several different credit card debts. More often than not, having these types of loans consolidated into one, will actually lower the amount of interest you ultimately pay. The other advantage of having credit card loans consolidated is that you will no longer have to worry about racking up huge late fees and service charges because you forgot about a payment for a few days. As long as you make your monthly payment on the consolidated loan, the amount of money you owe will decrease at a steady rate.

One of the reasons some people find that consolidating their debts is not the answer they were hoping for is due to interest rates. There have actually been incidents where the consolidating the loans have increased the amount of interest the person has to pay over time.

Another thing to consider is the type of loans you are hoping to consolidate. Some loans, such as a second mortgage on your home are best if you don’t consolidate. One reason for this is because the consolidation changes the terms of the original loan.

One of the things you may want to consider is a plan that allows you to consolidate some of you loans and leave others unconsolidated. This works especially well if you are able to consolidate similar loans. For example you may consider consolidating your various student loans, and maybe consolidating all of your credit card loans into one lump payment, but leave your car loan and mortgage unconsolidated

For some people debt consolidation is the best possible answer to their financial situation. You are the only person who can determine if the process is a good fit for you. You should also plan on meeting with a financial counselor before making any final decisions.

For more information, click here: