Is Debt Consolidation a good idea?

I regularly get emails from people asking for advice on whether they should do a debt consolidation. While I have written a little bit about bankruptcy, I haven’t written much about Debt Consolidation programs.

What is a debt consolidation?

Basically as the name implies, it is combining a bunch of smaller debts into one larger debt. Often times, in order to fetch the borrower a better interest rate, the unsecured debts (i.e. credit cards) will become collateralized in order to get a better interest rate. To explain this further – credit card interest rates are normally higher because they have no colatteral if the borrower doesn’t pay. Conversely, a bank has your house as colatteral for a mortgage loan, therefore they can offer a lower interest rate.

Wikipedia’s debt consolidation page goes on to explain even more…

“Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.

Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.”

So is it a good idea?

Generally, my answer is no, it isn’t a good idea. The vast majority of people in debt are not in irreversible dire straights financially. They can dig themselves out of debt with a lot of determination, hard work, and of course, Gazelle Intensity.

But most people don’t really want to work at getting out of debt, they just want a quick fix – and they think a debt consolidation will be the answer. These are the people who absolutely should NOT do a debt consolidation.

As Larry Burkett says, “the debt is not the problem; it is the symptom.” For most people considering a debt consolidation, excessive spending is the problem and the excessive debt is their symptom. Therefore, the spending problem is what needs to be fixed – not the debt. And as the spending problem gets resolved it will slowly, but surely, take care of the debt problem.

Enabling the spenders

The danger of a debt consolidation for people who still have a spending problem, is that it enables them to spend a lot more. Once the debt is consolidated, it provides “breathing room” which is great if they are going to take that extra amount and use it to pay off their debts faster, but the sad reality is that most people don’t. In fact, according to an insider, “78% of the time, after someone consolidates his credit card debt, the debt grows back.”

It works for some

Having said that, I have seen close friends who were greatly helped by a debt consolidation. Like I said before, the difference with them and the others who used a debt consolidation to their benefit, was that they didn’t have a problem with spending. They got their payments lowered via the consolidation and used every extra dollar each month to pay down the debt faster.

Personal responsibility

Bottom line, it comes down to personal responsibility. We are all accountable for our actions. We are all stewards of what we have been given, whether we like it or not. We need to be honest with ourselves and “make no provision for our flesh” (Romans 13:14).

Final thoughts

So, to sum up my thoughts about it, If I were in debt up to my eyeballs right now I would follow the 7 steps to getting out of debt (which I did). If for some reason things were so terrible that after following those steps I still could not make progress I would get help from a debt management company who could help me manage my debts and help me with the lenders.

What about you? Have you done a debt consolidation? Did it help you?

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15 Comments
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  1. I did debt consolidation a many years ago and it “helped”, but because my behavior had not yet changed, I found myself in the same predicament again. It was definately a quick fix that did not diagnose the symptom of why I had debt.

    I recommend going thru the NFCC if you are going to use one though as opposed to 3rd party organizations that are looking to profit off of your debt.

  2. My husband and I did SEVERAL debt consolidations in the past, each of which gave us that breathing room you talked about, and in each case, we racked up more debt–up to $50,000. When I could no longer sleep at night, we call Consumer Credit Counseling. It took us five long years of a payment as big as our mortgage, and NO CREDIT, but we did it!! Now we live credit-free and debt-free and are so glad we took the path we did. We started with CCC before we actually missed any payments on anything, so it did not ruin our credit. My only complaint is that we got help with lowering interest rates, but NO counseling.

  3. Oops, forgot the most important thing I wanted to say–the biggest advantage to CCC, I believe, is the accountability. They do not tolerate late or missed payments. We would never have had the discipline to make that payment every month if we were on our own. That in itself was worth getting into the program.

    • Diane,
      thanks for sharing your story – that is encouraging to hear that you guys made it!!

  4. That a wonderful story. Great work guyz . ITs a encouragement that you guyz are doing for the younsters to come. Great going

  5. Jennife

    I did debt consolidation when i was around 22/23 years old, and it was the greatest thing i could have done at the time. 3 years later, all my debt was paid off. I’m now in a bind again, but not as bad as before. Just still trying to learn how to budget for my family. I’m now 27, and its still hard.

  6. It has its good sides and bad sides. It can help a lot of people if they consolidate, then cut up the cards and quit using them. On the other hand for the hard core spenders it just frees up some credit they can spend. If everyone could get on a cash only budget the world would be such a better place.

  7. What does CCC stand for?

  8. Thank you. Thinking of doing this, but nervous. My credit is good, but I am struggling every month. Not sure if this is right for me or not. But I like the above story where the person said they went with CCC and it did not hurt their credit. When I talked to someone yesterday from a Debit company, they told me I had to be late on my payments for 4 months. Is this true. Any help or advice is greatly appreciated.

  9. I just looked up CCC and there are a bunch of them. Can you tell me which one specifically that you trust. I am not sure if the link provided by my computer is right because the name is different. I want to be sure I am going with a reputable company if we choose to do this!

  10. My husband and I have been thinking about doing debt consolidation but we are a little scared Im hoping for some good advice whether or not debt consolidation is a good idea for us. We dont really have spending issues with credit cards. we just want to lower our monthly payment to put some more money away into savings. Also we will be making a higher then minimum payment. we basicly want to combine our two car payments with our mortgage and get some money back for some renovations around the home. we got our home for less then what its valued at. we have been looking at this VA backed company (we are military) called New Day VA. We wont be living in this house forever but we want to keep it and rent it out. We might buy one the next place we get stationed and I was also wondering will the debt consulidation hurt our credit score and chances of buying another home.

  11. Kristen

    My husband and I got into some debt when we were younger and he was developing his career. We haven’t used credit cards in more than 2 years and still struggle to keep the monthly payments current. In the last year, I have negotiated my creditors to settle the debts for less than what I owed (4/6 were in collections stages already which made the negotiations a little more favorable to me), and the other two offered me internal assistance where we agreed to close the account, lower the interest rate, and pay off the card quicker. One of those plans worked amazingly and the other worked for the first year, but I didn’t realize it was going to end and I’d be on my own again. When that happened, we fell behind again and struggled to rebound. I was referred to Money Management International, a non-profit debt counseling and consolidation company. They were so helpful, respectful, and patient. They went over my budget with me in detail, referred me to different websites to learn more about budgeting and to find tools to help keep us on track. Fortunately, I had figured a lot of those things out as we have been traveling this road, but I was so grateful for their help. The program will have our debt (only one credit card outstanding) paid off in 3 years, 3% interest rate, and we were able to set our payment date. Additionally, if I miss a payment, there is no late fee, and instead of doubling the payment for the following month, it is just basically added to the “end” of the term. It would be easy to abuse this, so discipline is a must, but this is a great solution for us. The spending problem was solved a long time ago, and debt free status is in our near future. Just thought I should put this out there in case anyone else could use a referral to a good company.

  12. We did debt consolidation one time. We have a rental that we wanted to get a lower interest rate on. We had a second mortgage on the house we were currently living in. So we took the extra money from our refinance to cover the second which worked well for us.

    The second time we refinanced, we took out a little money for house repairs. I figured that it was still going into the house and our payments would still be lower.

    Right now we’re struggling a bit with debt. I just think if it’s always in the forefront of your mind, you will consciously figure out a way to lower your debt or lower your spending. If I consolidated my loan, I might be comfortable enough to take on more debt. So I agree, it’s best not to consolidate debt.

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