Is Debt Consolidation a Good Idea?

Scrabble Series Debt

We can probably all agree that debt sucks.  Debt is a financial pit we should escape and avoid.  But often we don’t realize this until it’s too late and we’re already ensnared by its grasp.

When we find ourselves struggling with multiple high rate credit cards, car loans, and medical bills it’s easy to think that debt consolidation is the answer.  But is that really the case?


How does Debt Consolidation work?

Debt Consolidation is just what it sounds like.  It’s consolidating multiple individual debts into a single combined loan.  Instead of several monthly payments to multiple lenders, you now have one combined payment for all the consolidated debt.

Credit card balance transfers or Personal loans from a bank are primary examples.


Is Debt Consolidation a good idea?

In theory a Debt Consolidation makes sense.  There’s a synergy to focusing on a single loan and often the new loan will carry a lower interest rate.  But does debt consolidation work?

In practice it works about as well as you do.  You see, personal finance is not always about the math.  If it were just about the math, you probably would not be in debt in the first place.  Instead, personal finance is about self-control and delayed gratification.  It’s about not making purchases until you can afford them.

The discomfort you feel as a result of so many little debts is actually good.  It gets your attention and pushes you to take action.  The key is taking the most appropriate action.  Doubling down on your payments, prioritizing debt smallest to largest, following a budget are all profound steps that come about through changes in your behavior.

On the other hand, a debt consolidation loan probably does more to self-medicate the pain than treat the underlying issue.

I recall several years ago getting a debt consolidation loan.  Again, on paper the benefit was obvious.  I consolidated most of my debt into a single loan with a lower interest rate and lower monthly payment.  And that’s the only thing that changed.  My spending patterns did not change, rather I felt empowered to continue my spending for two dumb reasons

    1. I believed that I had solved the problem
    2. I now had extra money each month as a result of the lower interest rate and monthly payments

This turned out to be pretty foolish as I found myself in an even worse position several months later.

However, that does not have to mean that Debt Consolidation is a universally bad idea.  Check the name on the site and understand that for me to write a debt consolidation blog article and not universally despise debt consolidation is somewhat blasphemous so I probably have a fine line to toe because I actually find truths on both sides of the discussion.


When is Debt Consolidation a Good Idea?

There are instances in which Debt Consolidation might be a good idea.  I’ll give two examples:

Debt Consolidation vs Bankruptcy – this is a no brainer.  I’ve written before here and here that I believe bankruptcy to be  a place you should be dragged kicking and screaming.  You should be forced into bankruptcy because all other options have been exhausted.  Restructuring your debt through Debt Consolidation or other Refinance vehicles are certainly options you should explore in this admittedly extreme situation.

Graduate Level, Ninja Debt Repayment – Debt consolidation should be at least the 6th step you take and only after you’ve mastered the following:  Make a Budget, Prioritize your Debt, Cut your lifestyle, Live on your budget, Progress in your Debt Repayment.  Once you are maximized your budget and experienced success, then perhaps you can squeeze a little more out of your debt snowball by consolidating debt and lowering interest rates.  But do this only with built-in accountability through automated payment systems and budget reviews with your spouse.

In most instances, by the time you’ve experienced behavior changes, the benefits (or risks) of the Debt Consolidation are not worth the efforts.  But I personally would not categorically rule it out in all cases.

Pros and Cons of Debt Consolidation

What are the Benefits of Debt Consolidation?

    • Immediate Relief – consolidating your debt can provide an instant relief to a strapped budget.
    • The Math is Sound – it’s true, a lower interest rate is better than a higher one, as it relates to debt.  On paper this will help expedite your journey out of debt.
    • Consolidated is Easier – mental clutter is removed by having only a single due date to manage and payment to make.  Redundancies are removed and time saved.

What are the Cons of Debt Consolidation?

    • Numbs the Pain – Paying off your debt solves the pain while consolidating it only treats the symptom.
    • Not a Behavioral Change – The key to your financial future lies in changing the behaviors that led to you being in debt rather than making being in debt easier to tolerate.
    • Can Lead to a Bigger Mess – learn from my experience.  I ended up in a bigger mess because I treated the symptom and not the root case.  I ended up with my consolidated debt payment AND a fresh batch of newer loans each eating away at my peace.


Personal Loans for Debt Consolidation

At this point, if you think Debt Consolidation is a SAFE option for you, then cruise over to my article on Peer to Peer Lending for an overview on a growing personal loan alternative that may be right for you.

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