Being in debt can be a stressful and overwhelming experience. It can feel like you are drowning in a sea of bills and payments, and it can be challenging to figure out how to get back on track. Debt consolidation is one option that many people consider to help manage their debt. It involves taking out a new loan to pay off all of your existing debts, leaving you with just one monthly payment to make. While debt consolidation can be helpful for some, it is usually a bad idea, so it’s important to weigh the pros and cons before making a decision.
Pros of Debt Consolidation
One of the main benefits of debt consolidation is that it simplifies your finances. Instead of having to keep track of multiple payments to different creditors, you only need to make one payment each month. This can make it easier to stay on top of your payments and avoid missing any, which can hurt your credit score. Just the idea of having one account instead of 12 credit card accounts feels freeing. But that feeling can be misleading, which we’ll discuss in the Cons.
Debt consolidation can also save you money in the long run. If you have multiple high-interest debts, such as credit cards, consolidating them into one loan with a lower interest rate can reduce the amount of interest you pay over the months. This can help you pay off your debt faster and save you money in interest charges. However, it is NEVER a good idea to consolidate debt into a mortgage or mortgage refinance.
Another advantage of debt consolidation is that it can help you avoid bankruptcy. If your debt is overwhelming and you are struggling to make payments, bankruptcy may seem like the only option. 99% of the time, bankruptcy isn’t needed and it doesn’t solve the root problem – habits. However, debt consolidation can provide a way to manage your debt without resorting to bankruptcy while you learn new habits.
Section 2: Cons of Debt Consolidation
While debt consolidation can be helpful in some situations, it is not the right choice for most. The biggest monster in the closet is… you. Many people feel like they’ve accomplished a financial milestone when they consolidate debt. They also feel like they have more wiggle-room in their budget now. So not only are people now happier (short-term) but they don’t focus on paying off the debt and instead they opt in for more payments to more lenders. According to a survey by US News & World Report, more than a third of respondents (35%) regret getting a debt consolidation loan. Among them, 38% each feel that the interest rate, fees and/or monthly payments are too high. The same percentage are frustrated that it’s taking them longer to repay their debt, instead of shorter. That’s probably because they rack up more debt afterwards.
One of the main drawbacks of debt consolidation is that it can be expensive. If you have a lot of debt, you may need to take out a large loan to consolidate it all, which can come with high fees and interest charges. This can actually make your debt problem worse in the long run.
Another potential downside of debt consolidation is that it can be a temporary fix. Consolidating your debt may help you get back on track in the short term, but if you do not address the underlying issues that led to your debt in the first place, you may end up in debt again in the future.
So what is the monster, the underlying issue? It’s your habits. When you stay on track and pay off you loans from smallest to largest (the snowball method), you gain dignity, motivation, and character. You start changing your behavior to money and your habits with money. When you do the snowball method, you also see firsthand how much that interest was hurting you because you paid off the loan. This is different than the debt consolidation. With debt consolidation, you see the smaller payments and interest rate as breathing room. With the snowball method of paying off each loan, you see the interest rate for what it is – a thief!
The first coaching session at Branch Financial Coaching is free. So why not talk with a professional and get that outside perspective before making a huge, irreversible decision like a debt consolidation loan? It can only help you.
Nathan Haefer is a founding member of Branch Financial Coaching who has worked since 2012 with the financial realm of businesses, nonprofits, personal accounts, and through local and State government positions. He currently coaches at BFC, is a committee member of multiple committees in the community, and a fulltime Realtor at the Acree Brothers Realty Team – Keller Williams Lynchburg at 18447 Forest Rd, Lynchburg, VA 24502. He can be reached at 434-771-3604 or 434-944-6982.