Debt: To Consolidate, or Not to Consolidate?

by Alexa Mason · 8 comments

Are you in overwhelming debt? If so, you’ve probably considered debt consolidation.

Some experts suggest taking advantage of non-profit credit counseling and consolidating your debt. They say it can help you gain financial traction more quickly. Others claim that consolidations loans are financial traps that should be avoided.

Below, I’ll explain debt consolidation — in hopes you’ll be able make the decision for yourself.

What is Debt Consolidation?

Debt consolidation is simply rolling all of your existing debts into one large debt. After doing this, you’ll start to make one payment per month to one creditor.

There are several ways you can consolidate debt. For example, you can use any of the following methods:

Non-Profit Credit Counseling: Non-profit credit counselors work with creditors to come up with solutions that satisfy both parties. For instance, a credit counselor might work with your existing debtors to have your late fees removed and interest rates lowered. A credit counselor will also help you create a budget, and many will have you send them one monthly payment which they will then disburse to your creditors.

Home Equity Line of Credit (HELOC): Another popular method for consolidation is to take out a line of credit through your home equity. This way, you can pay all of your debtors off and make payments on your HELOC, which normally comes equipped with a low interest rate.

Debt Consolidation Loans: Many banks have loans designated for debt consolidation. You’re usually required to put up collateral to take out one of these loans. If you don’t have collateral, you may be able to qualify for an unsecured loan — but these will come with much higher interest rates.

Other popular options are putting all of your debt onto a low interest credit card, or taking out a personal loan.

The Pros of Debt Consolidation

Contrary to what some of the popular financial gurus claim, there are indeed pros to debt consolidation.

If you’re constantly being hounded by debt collectors, this is an easy way to get them off your back.

It also simplifies things: you’ll be making one payment to one creditor. Not to mention you’ll probably be able to get a lower interest rate than what you’re paying now (especially if you have credit card debt), and therefore you’ll have a lower monthly payment.

Lastly, if you work with a credit counselor, you can have late fees waived and interest lowered — which lowers the total amount of money that you owe.

The Cons of Debt Consolidation

Anybody who follows financial guru Dave Ramsey will recognize the following statement: “Debt consolidation is dangerous because you only treat the symptom.”

This is true: it does no good to consolidate debt, unless you’ve dealt with the underlying habits that caused you to get there in the first place. If you haven’t addressed those issues, you’re setting yourself up for a repeat failure. So, before consolidating your debt, make sure you’re committed to changing your financial ways.

Do you think debt consolidation is a good strategy for paying off debt?

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  • Thomas Bright says:

    Great article–this explains a lot, and the pros and cons are particularly helpful!

    I just wanted to point out one important distinction. Credit counseling technically isn’t consolidation. That’s because in a credit counseling program, the consumer pays off each creditor they owe, individually and in full. Now, the consumer sends in one payment to the credit counseling agency (so it feels like consolidation in the sense that only one monthly payment is required), but multiple creditors aren’t bundled into one. Credit counseling also has a coaching/counseling component which helps address underlying behaviors and habits.

    I totally see where you’re coming from though–it “feels like” consolidation and had very similar benefits.


  • debs says:

    We’ve done debt consolidation a number of times (egads!). This last time has been the biggest and it will be our last! We took out a $236K mortgage on our home after consolidating credit card debt. We couldn’t even get enough equity in our home to do this and still had $12K on an unsecured line of credit. It will take us 6 years to pay it off. What’s different this time? We are tracking our spending and following a budget. There is no other way. To reduce interest costs on credit cards makes this a smart move, but only if you reduce your spending and are extremely diligent to not repeat previous lifestyle inflation mistakes that got you there in the first place.

  • Property Marbella says:

    Debt consolidation can be good for many who are in the wrong in its economy and give them a chance to sort out their finances if they also work hard with a budget that allows them to become debt free one day.

    • David @ says:

      You are right Marbella. Done right, consolidating debts can drastically lower payments and also simplify your life. It’s definitely an option everybody should at least consider if the opportunity presents itself.

  • bill allen says:

    My wife and I had to almost laugh at this article. I’m 54, she’s 46 and we became totally debt free 4 years ago. We owe nobody! I have to tell you, it’s the most wonderful, freeing feeling in the world. My advice to kids these days… Don’t assume any debt. Ok, maybe you need to take on debt for your first house. But either get a 15-year loan or a 30-year and make double principle payments (even more if possible). I tell them to not even assume debt for a car. Save for a car, or buy a used cheap car and then save for one. Now that we’re out of debt, my net worth has been increasing over $4000/month. And I make less than $50K/ year

    • David @ says:

      Congrats on knowing the feeling of freedom! Being debt free is truly a wonderful feeling I wish more people will get to experience!

  • Gary Kerr says:

    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.

    • David @ says:

      If you can comfortably handle the payments, consolidating into a secured loan will likely lower the interest rate and thus free up some cash flow. You just have to carefully assess your situation because you may lose that asset if you can’t come up with the payments.

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