Debt consolidation takes all of your debts and rolls them up into one smaller, ‘more manageable’ monthly payment. I know debt consolidation seems like an answer to your prayers. Until you look under the hood. Then you see the gremlins that can cause it to worsen your debt nightmare.
What happens when the bills are starting to get behind?
The Ford truck payment. The Honda SUV. The six credit cards. The mortgage on the house.
Is debt consolidation the answer? Let’s take a look.
Debt consolidation – what is it?
Let’s say you had six credit cards with balances:
- JC Penney
A debt consolidator would take all six balances and create a monthly payment for you that is lower than all of the minimum monthly payments combined.
Lower payments sounds great, doesn’t it?
The promises are true
On the surface it sounds great because they promise to:
- Stop the bill collectors from calling
- Give you a chance to get back on your feet
- Reduce your stress
- Leave you with more money to spend
Who wouldn’t want these things if you’re in debt?
It’s true – you will get all these things if you consolidate your debt.
And you’ll have more cash each month
Watch out for the gotchas, because you don’t want to do this. Consider a couple where one of them lost their job. They have the following two loans which they are now struggling to keep up with:
- $20,000 on a 4-year loan at 10%
- $15,000 on a 3-year loan at 12%
The monthly payment on the 4-year loan is $507.
The monthly payment on the 3-year loan is $498.
The friendly debt consolidator comes along and says:
Hey folks, I’ve got great news. You’re currently paying $1005 a month, but I’ve talked with the lenders and I can get you a reduced interest rate and get your monthly payment down to $630 at only 9% interest!
Sweet! You’re thinking “I’ll have an extra $400 in my pocket each month.” And this is true.
You get the lower monthly payment by spreading out your payments over a longer time. I use six years in this example and that results in you paying:
**$10,424 in interest for the new longer loan vs. $7,238 for the original loans. **
You just paid an extra $3,000 in interest for the privilege of spreading out your payments.
Does that sound like a deal to you?
It’s going to cost you an extra $3,000.
What is the best way to consolidate debt?
Debt consolidation is bad for your wallet because of the added expenses it creates.
It also doesn’t address the underlying problem that usually is the reason people need this type of service – poor spending habits. Half of Americans spend more than they earn. That leads to debt, which leads to the need for debt consolidation for some.
Turning to debt consolidation without addressing the symptom of overspending is like trying to lose weight by only exercising. Overeating causes weight gain – first focus on eating habits.
How can you get out of debt AND not waste a ton of money on interest? You need to make a spending plan and a get out of debt plan.
You can be your own debt consolidator by making a few lifestyle changes. You won’t get stuck wasting thousands of dollars in interest payments.
Are you considering debt consolidation?
It took me a couple years to get out of debt. Now I am debt-free. It started with one simple change:
Spend less than you earn.
How can I get out of debt?
It may seem like a daunting time in your life. It will take some time, but you will get out of debt. When you do, you’ll make the debt consolidators look like chumps.
Take one simple action today – change starts with you.
Start by healing your financial wounds with a spending plan and get out of debt plan.
What about a debt consolidation service?
I understand some of you have reached the end of your rope and are looking for a lifeline. You may be unable to make it work in your situation. Not everyone can follow the one-size-fits-all cookie cutter solutions.
If you have decided that the only way for you to get out of debt is debt consolidation, it will be a disservice if I didn’t tell you about legitimate companies that do this.
Again – I don’t recommend debt consolidation. It doesn’t fix the problem (your spending habits), and you’ll probably end up with more debt.
Visit the National Foundation for Credit Counseling (NFCC) or call 1–800–388–2227. NFCC offers free or low-cost debt counseling. About one in three of NFCC clients just needs some budgeting help to get their lives back on track.
Question: Do you struggle with debt? Are you considering debt consolidation? Please comment below.