When Debt Consolidation is not a Good Idea
Debt consolidation looks very appealing. At minimum, consolidating your debt will simplify your debt situa
tion for you. This means that you won’t have to struggle to remember which payments are due to which lender and when each one is due. In some cases, debt consolidation can even lower the rate of interest that you will pay, depending on your situation.
What is Debt Consolidation?
Debt consolidation works by taking your various loans (personal loans, credit card debts, etc.) and combining them into a single loan. For many people, the goal of debt consolidation is to simplify various loans with different (often variable) rates into one loan that has a single, fixed interest rate. Hopefully that interest rate is lower than the average rate of all of the other loans.
However, debt consolidation isn’t always a good idea.
When isn’t debt consolidation a smart decision?
One situation where debt consolidation isn’t a good idea is where the debt consolidation loan is stretched over a very long period of time. In many cases, the interest rates on debt consolidation loans are lower because you have a longer time period to pay back the loan. However, if the timeframe of the loan is very long, you could end up paying more overall interest than if you paid the original debt at the higher interest rate in a shorter period of time.
Another issue with debt consolidation is that it doesn’t do anything to change the behaviours that got you into debt trouble in the first place. Some people end up racking up credit card debt right after they’ve paid off their existing debt through debt consolidation. Others quickly spend the “savings” that they have from lower monthly debt payments. This is an issue because, once your debt is paid off, you’ll need to develop good money habits in order to avoid ending up in a similar situation later on. Debt consolidation doesn’t do this on its own.
Debt consolidation only works if it’s accompanied by a plan to avoid falling back into debt again. Otherwise, it’s just delaying financial troubles, not solving them. In order to be successful at reducing your debt and avoid building it back up again once it’s been paid down, you need to have a budget and a financial plan. If you make a plan and stick to it, you’ll put yourself in a better financial situation and avoid the behaviours that led to your debt problem in the first place.
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