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.
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.