Is a Debt Consolidation Loan Good?

Q: I have several debts that I am having trouble paying. Is a settlement with a debt consolidation loan a good idea?

A: The allure of the debt consolidation loan is that you can lump all your debts together and have a lower monthly payment. This may be true, but it is still a bad idea for the following reasons:

1.Settlement Is a False Sense of Security

You get a false sense of accomplishment that you did something about your debt. You didn’t! You still have the same debt; you simply moved it.  A debt consolidation loan doesn’t fix the problem, it just masks it.

2.You Don’t Save Interest

You are told that debt consolidation loan will save you interest. This is not always the case. Why? Because lower rate debts are often consolidated with the higher rate debts.

3. You Just Stretched Out the Problem

Don't Stretch Out The Problem

photo credit: kalebdf

If your monthly payments are lower as a result of the loan, you have probably agreed to stretch the debt out over a longer period of time. BAD IDEA! Your goal is to get out of debt, not prolong it.

4. Change The Behavior

You have dealt with the symptom, not the problem. The symptom is your debt; the problem is that you are not good at handling money. 78% of people who take out debt consolidation loans build up new debt (usually credit card debt) and end up much worse than when they started. You need to ask the person in the mirror why he is in this mess.

5. Best Plan is Debt Snowball, Not Debt Consolidation.

The best plan is to use the debt snowball method, attacking your smallest debt while making minimum payments on all other debts. Once that first one is paid off, roll the payment amount, along with the minimum payment, into your next smallest debt. You will gain momentum as you see these debts disappear and you will actually be accomplishing something: paying off debt! Imagine for one minute what it would be like to have no debt whatsoever. You will have something most “normal” people in the USA don’t have: MONEY!

This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.