Debt Consolidation - Is it a Good Idea?
By Steve Gillman
Why is debt consolidation necessary? Maybe it isn't. It seems
like the easy way out of the problem of too many payments every
month. When your credit card and loan payments add up to $900
every month, why not just get a loan that will pay all of these
debts off and have a nice easy payment of say, $300? There are
two reasons why this may be a bad idea.
Don't Ignore the Cause
Too much debt? Why? Rarely is the cause due entirely unforeseeable
circumstances. Most often, if you have debt problems, it is because
you buy too many things on credit. In other words, it is due
to bad financial habits.
Now what happens when you combine all that debt? Do you have
less debt? Maybe you get a lower interest rate on average, but
you still owe all the money, right? Your consolidated debt is
just easier to pay, because it is in one lower payment stretched
out over a longer period. What else becomes easier now? Adding
This is exactly what many people do. They get their $900 of
various payments rolled into a loan with a $300 payment, and
now they have all that excess income. Time to go buy some things
on credit. Obviously, debt consolidation can be a way to postpone
reckoning with the real problem - bad financial habits. Postponing
dealing with debt makes it much worse, of course.
Debt Consolidation Costs More
It may seem like you are saving money on interest with some
consolidation loans, but this isn't always true. The problem
is that you are converting short-term debt into long term debt.
The longer you take to pay off the money owed, the more you pay
Let's look at an example. If you owed $6,000 on a credit card,
with 18% annual interest, it would take a payment of $176.26
per month to pay it off in four years. You would pay a total
of $2460 in interest. Suppose, in order to get the best interest
rate and easiest terms, you rolled the debt into your 30-year
mortgage on your home (many people do this). If it was a 7% loan,
it would add only $39.92 to the payment. That's easier than $176,
and a much lower interest rate, but how much total interest will
you pay over the years? $8371 - more than the original debt.
Of course there are debt consolidation loans that are not
for 30 years, but you get the point. Even with a 15-year, 7%
loan, which would costs $53.93 per month, you would pay at least
50% more in interest than with the 18% 4-year payoff. Converting
short-term debt into long term debt can cost you a lot more in
Try hard to make those payments and get rid of that debt sooner.
You'll be glad you did. Of course, it may be impossible to make
those payments. That happens, but for a reason. At least work
as hard on changing your habits as you do on getting that consolidation
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