Is Debt Consolidation Right For You? 5 Hard Truths You Need to Face

By Chika


Last Updated: April 15, 2023


Debt consolidation is the process of collecting all of your loans and taking another loan to pay them off. 

These loans are used to pay off multiple debts which are consolidated into a single sum. 

Debt consolidation doesn't erase the original debt, but transfers a consumer's loans to a different lender or type of loan. Many people prefer to consolidate their loans because it provides the convenience of servicing only one loan with a lower overall interest rate

In the United States, there are certain companies and private law firms that provide professional debt consolidation services. Individuals can approach them for debt help, and make monthly payments, which is then dispersed among the various creditors the person is indebted to. 

However, a particularly important question that bugs most people seeking ways of managing their debts is if consolidation is worthwhile. To answer this, you may have to consider the advantages and disadvantages of debt consolidation.



5 Hard Truths About Debt Consolidation

1. No guarantee your interest rate will be lower.

Though the interest rates of debt consolidation loans are usually lower, this is not cast in stone.

Lowering your interest rate is at the discretion of the lender or creditor who determines how ‘low’ your interest rate would be. This ultimately depends on your credit history. 


2. Interest rates can change.

One factor people tend to overlook is that interest rates can change over time.

This is especially true when you apply for “special” low-interest deals or during holiday deals. These low-interest rates are used to entice customers and are applicable only for a certain period. After this, the interest rates could revert to their original rates.

Be wary of debt consolidation plans that are offered during the holiday season as companies know shoppers tend to overspend this time of year.


3. You will be in debt for an extended period.

Debt consolidation keeps you in debt for a more extended period, which ultimately defeats your debt management goal in the first place.

The interest rates are lowered not because you aggregated your debts into a single account, but because the period has been extended. 


4. Debt consolidation doesn’t mean debt elimination.

Debt consolidation means that you are restructuring your debt. It does not eliminate your debt.


5. It doesn’t change your financial behavior.

While it may address your financial predicament, it doesn’t reach the root of the problem, which is your financial habit.

This is why people fall back into debt even after taking out debt consolidation loans. If you haven’t established good money habits, then you will most likely end up in debt again.



When Debt Consolidation is Smart

The reason you're consolidating your debt in the first place is to ease the burden of your previous debts.

However, unless you are prepared to make sacrifices and behavioral changes towards your finances, then debt consolidation may only reinforce your vicious cycle of debt.

Making changes to your spending habits is the first step.

This implies reducing credit card expenses or putting them away totally.

Also, ensure that your total debt (excluding mortgage) does not exceed 40% of your gross income.

Pay attention to your cash flow. If it consistently covers payment towards your debt, then debt consolidation should not be a big deal. 



When Debt Consolidation Isn't Worth it

Consolidation is not a one-size-fits-all solution for your debt problems.

There are numerous alternatives you can consider and compare to debt consolidation.

However, there are certain situations in which you may be worse off by applying for it.  

  • If your debt burden is small or can be paid off between six months and a year at your current pace, then don't consolidate your debt.
  • If your total amount of debt exceeds more than 50% of your income, and this calculator reveals you don't need to consolidate your debt, then you are better off seeking other alternatives such as debt relief.
  • If you haven't addressed your spending and financial habits, then debt consolidation may be a huge mistake. You need to address the root cause of the problem that got you into debt in the first place.
  • If you can’t do without your credit card, then debt consolidation may be a banana peel for you.



Is a Debt Consolidation Loan a Good Idea in Your Current Financial Situation?

Getting approved for debt consolidation doesn’t mean that it is the wisest choice.

As seen from above, there are situations which are favorable for debt consolidation, and there are times when you should not even bother consolidating your debt.

The key is clarifying your financial goal. Browse and research alternatives and pay attention to your overall interest rate, not just your monthly payments.

Put a timeline on when you want to be free of debt. Plus, some unscrupulous lenders will approve you, even with bad credit. This can plunge you deeper into debt, because you took out a loan you couldn't afford.



Debt Consolidation: Your Best Bet Out of Debt

Most people get into debt because they adopt lifestyles their income can't support.

Money management is 80% behavior and only 20% math.

If you don’t control your behavior towards money and finances, you will never be able to address your debt problem effectively.

The best way to get out of debt is by paying it off, not consolidating them. To do this, you need to change the way you view money and your debt situation. This takes a lot of discipline and sacrifice, but it is worth your while.

Editor's note: this article was originally published Aug 13, 2021 and has been updated to improve reader experience. 


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