Most of us plagued by large amounts of debt have considered debt consolidation at one point or another, and with good reason! After all, debt consolidation is combining all of your debts into one large debt and just making one payment per month. Awesome! Ain’t nobody got time for multiple payments, amiright? However, before you take the easy route, consider the following reasons why you SHOULDN’T consolidate your debt load.
1. You haven’t solved the problem! Consolidating your debt is essentially just moving it elsewhere and pretending you’ve dealt with it. You haven’t! Sometimes the easiest thing is not the best thing.
Often times, people who consolidate their debt quickly run the debt back up. Why? The habits haven’t changed. Debt payoff is just as much emotional as it is mathematical, maybe even more. Obviously, if you were so good with math, you wouldn’t have run up debt in the first place. After all, basic addition and subtraction tells you when you can and cannot afford something.
If you are not willing to cancel your credit cards once they are consolidated, you will continue the debt cycle for the rest of your life. Have fun with that.
Related: 6 Steps to Get Out of Debt
2. Lower interest rates don’t mean anything when the terms are extended. A huge draw for consolidating debt is the fact that you can get a lower interest rate (which is not even necessarily true). This means that you will pay less, right? Not necessarily. The majority of debt consolidation cases actually extend the terms of the loan. So your interest rates and payments are smaller, but they are drawn out over a long period of time.
Compounding interest can work for you (saving, investing) or against you (debt). That “low interest rate” will cost you more because it keeps you in debt longer. That is, unless you are paying off your debt rapidly. However, per number one, you probably aren’t as you haven’t actually fixed your habits. Don’t be duped by the “lower interest rate, much longer terms” schtick.
3. Speaking of lower interest rates…bye, bye motivation! So you’ve bought into the lower interest rate. Great, now what’s your motivation? Paying off debt totally sucks, don’t take away your only motivation to keep on trucking!
Many people start ignoring their debt loads when the interest rates are lower. For example, people power through their credit card debt but relax when they get to student loans because the rates are significantly smaller. Motivation does what math doesn’t, it makes you really freaking mad! Low interest rates and low payments will hold you back from attacking your debt with a vengeance. You need to get and stay mad or you will never get through this.
4. You aren’t going to find a lot of awesome options. Believe it or not, people with large amounts of debt (aka everyone who would even consider debt consolidation) don’t actually get awesome options for debt consolidation. Why? You are really freaking high risk! At best, you will get offers with unfavorable terms and higher interest rates — completely defeating the purpose of consolidating debt in the first place!
I understand the ridiculousness of the fact that debtors with large amounts of debt cannot get a decent consolidation offer to help them out. But it’s the same thing as trying to acquire credit, you might get approved but you will not be getting great terms. Life isn’t fair, learn that now before you let the credit and debt industries kill your spirit completely.
5. Making plans and taking action are two completely different things. As stated before, the majority of people who consolidate their debts run up the debt again in a short amount of time. These are the same people who are making intricate and complicated plans to get out of debt and then don’t actually do anything.
I concur, planning debt freedom is way more fun than the boring part of actually paying the debt off. Unfortunately, even the most beautifully detailed spreadsheets (I really love spreadsheets) are pointless unless they are utilized to get your debt paid off. Debt consolidation sounds like an awesome way to plan the attack of your debt, but it really isn’t solving any problems.
Related: 5 Debt Traps and How to Avoid Them
6. There is a difference between debt consolidation and debt forgiveness. Please understand that none of your debt is going away when you consolidate. Many people confuse consolidation and forgiveness. Debt forgiveness, or debt relief, is the partial or total forgiveness of debt. Sounds great, right? Well, every dollar forgiven is one dollar of income for tax purposes. Ouch.
On the other hand, debt consolidation is just taking out one loan to pay off your other loans. It isn’t a magic bullet that makes some of your debt disappear. You will pay back the same amount, over a longer period of time, often with no interest rate benefit. This is looking way less appealing, isn’t it?
So what should you do?
Start by listing each of your debts — creditor, interest rate, and balance. Then pick a target account — based either on amount or interest rate, whichever motivates you more. Set up automatic minimum payments on all of your debts (other than the target debt). Many people suggest consolidation so you are less likely to miss payments and incur fees, this will combat that. (Also, get a planner or a smart phone. You should totally know when your bills are due.)
Now, throw all extra cash allocated to debt at the target account. Once you get mad enough about your debt, you will magically find more and more money to allocate to debt repayment. See, that really isn’t difficult!
Before you consolidate your debt, consider these six reasons not to. Paying off debt the traditional way is not only more motivating, it is also pretty damn simple. Good luck on your journey out of debt and into financial freedom!
What do you think about debt consolidation? Do you agree that it pretty much sucks?