Debt consolidation is often one of the first ideas that come to mind when you’re overwhelmed by debt. But is it a good idea? Rarely, and here’s why.
On the surface, debt consolidation — where you combine the money you owe into just one loan — certainly seems like a good idea. Instead of multiple bills with a variety of interest rates, you get one bill and one interest rate. It seems easier to manage, and the average interest rate may actually go down. It’s all very logical.
And that’s the problem. When it comes to debt, we aren’t logical.
Illogical choices
If I offered to sell you a sandwich for $10 today or $14 tomorrow, would you choose to pay the $14? Of course not. It’s not logical. But somehow we’re fine with swiping the card and paying “nothing” right this second, but $14 (or more!) later. Our emotions — our hunger for the sandwich or our desire to have something right now — override logic.
We don’t get into debt logically, and we can’t get out of it that way either — at least not at first.
What happens if we try? Often we end up even deeper in the hole than we were to start out with, because moving our debts around does nothing beyond giving us a false sense of relief.
We feel like we paid off the credit cards and car with our debt consolidation loan, and we may even joyfully tell people that “we paid off our car!”, but the truth is, we didn’t pay off anything. We still owe the same amount of money. We’re just paying a different company.
The really bad part is, we feel better. And let’s face it: most of us don’t do anything about a problem until we can’t stand it any longer.
So we don’t change anything about our behavior.
And the next time we need money, we do what we’ve always done.
We borrow more.
Before we know it, we owe even more money and are right back where we started with multiple loans and multiple interest rates. Except this time it’s worse, because the total amount we owe is higher.
I know, I know. You’ve got more self control than that. You’ll be the exception. Except you won’t be, just like I wasn’t.
It’s not about self-control though. It’s about changing the things you do and the way you view borrowing money — long term.
Make your changes first, and then consider a consolidation loan — if you still want to — once you’ve has at least a solid year of real debt reduction under your belt. The first change is no longer looking toward debt for the answer.
I hear you. I would like to be a little fly on the wall of every bank and swoop down and stop every person that comes in to consolidate or take out a home equity loan. Even if you have reached the end of your rope and you cannot make your payments, it is better to ruin your credit for a short while and snowball than to consolidate or tap your equity because 2-3 years later you are right back where you started. We all have great excuses and some of them are good but it is habits that we need to break before we ever consolidate.
I have played this game for over 25 years. We became horribly in debt during college when we had a baby girl(deceased) with heart defects. Our insurance only covered the first $10,000 of her medical bills which came to over $80,000, the hospital forgave $20,000 and my parents came in and loaned us the money to pay the other $40,000. We were so busy scrambling that poor habits developed.
After 20 years of paying off this debt I developed a rare and deadly type of arthritis that runs in our family. So in came another $35,000 worth of experimental chemo drugs not covered by insurance. Where did we go? To the home equity! I immediately went into remission but we continued spending to the amount of $73,000. Yes you can look back and see that we have been slammed with some very bad luck, but so have most people. We just did not control our spending. We used poor me attitude to over spend and consolidated our way into a nightmare. Never consolidate, just pay and learn. It is so easy to use excuses to over spend. I always blamed under earning and medical bills for my money problems and yes they contributed but I am the problem. Well NO more, I am the solution. What were your excuses?
You have such a great attitude — you’re bound to get out of debt! My excuses weren’t even anything worthwhile, just stupid stuff like “well but my car broke down”. Things really turned around when I started saying “So what, I’m waiting til I have the money” instead of turning to credit.
Hi Jackie – I worked in mortgage lending for many years, and what you’re writting is right on the money. People wait until they’re drowning in debt, then do a consolidation. But because they don’t change their spending habits, the consolidation does little more than put off the day of reckoning. For millions, that’s been the decline of house prices that shut off the housing ATM.
I wrote a post on this topic for another site, but I wish I had read this first!
That’s a cool visual — shutting off the housing ATM. Glad you enjoyed the post :)