Is Debt Consolidation Always Good?

By Michael Strauss

These days it's hard to go anywhere without being exhorted to take out a debt consolidation loan that will solve all our financial problems and let us live life to the full once again. If you're experiencing financial difficulties and are having trouble making ends meet, then debt consolidation can indeed seem to be the perfect solution, as you'll end up paying less each month and also relieving the stresses and strains associated with money troubles.

Unfortunately, it isn't quite as simple as that. While there's no doubt that consolidation can work well, and achieve all the results that the adverts describe, there are also drawbacks that you need to be aware of before signing on the dotted line.

Long Term Interest Charges - More Expensive

The first main problem is that of interest. In order to secure a lower monthly repayment, you'll either have to get a lower interest rate on your debt, or spread the repayments over a longer period. Most consolidation programs will work on a combination of the two, but any deal which results in a longer repayment term will generally mean you'll pay more interest in the long run. This is, after all, how consolidation loan companies make their profits.

From your perspective, it's a trade off between short term relief from financial struggles and the longer term expense of servicing your debt, and only you can decide whether this trade off is worth it for you.

Wiping The Slate Clean

The second potential problem is that after consolidating your debts, you'll be left with a range of nice, clean, empty credit card balances and so on, with all the temptations to spend which probably got you into trouble in the first place. If you consolidate and then run up more debt in addition to your new loan, then you'll be in a much worse position. Consolidation requires the discipline to cut yourself off from your credit lines so that you can't use them - so close those accounts.

Your Home Is At Risk...

The final problem is that many consolidation loan borrowers will be converting unsecured debt (eg credit cards) into secured debt, where your home is used as collateral. The phrase 'your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it' is no idle threat. If you get into arrears on a secured loan, you stand a very real chance of losing your home.

So does this all mean that debt consolidation is a bad idea? As with all financial services, it's vital to understand what you're getting into, and weigh up the pros and cons before committing yourself. Only then can you make a sound decision on whether to proceed.