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Debt Consolidation Pros and Cons

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debt-consolidation-pros-and-consDrowning in debt? Tired of all those payments you need to make? Debt consolidation might be something to look into.

But, just as with any other financial product, you need to be careful and do your homework.

How does debt consolidation work?

You take on a new loan that will cover ALL your previous loans. Instead of making several payments each month to various creditors, you just make ONE payment.

Usually the advertised interest rate is smaller and monthly payments are more manageable. This is what loan consolidation company advertise.

But the story is not as simple as that:

Debt consolidation cons

You will end up paying more

The consolidation loan you’d be taking, while giving you a single (smaller) monthly payment to consider and a smaller interest rate, will keep you in debt LONGER.

The debt consolidation companies are in business to make money, so nobody is going to do the work for free. This means that, while you can get a smaller monthly payment, you will end up paying more in the end.

You’ll lose thousands of dollars this way, money you could keep to yourself if you paid off your debt by sticking to a debt payment strategy for a little longer.

You haven’t addressed the main issue – reckless spending

In many cases we get into debt because we overspend. We get a student loan, then spend too much on our credit cards, maybe a car loan or a personal loan, too.

Taking a consolidation loan would treat the effects, but not the cause. In many cases debtors have still recklessly used credit cards during or after debt consolidation, which brought them into an even bigger financial distress.

Studies claim that more than 75% of people who resort to debt consolidation will get back in debt soon after, because debt consolidation for them is just a quick fix and they get back to their bad spending habits as soon as their financial state is more secure.

Debt consolidation pros

Smaller interest rates

For many debtors, interest rate is the straw the breaks the camel’s back. Having one loan only with a more manageable interest rate is clearly better than the huge interest rate many have on their credit cards.

A smaller monthly payment

Even if you are in debt longer, having to pay less each month will help you clear out some money to save or invest.

Easier to keep track of your monthly payments

When you have one monthly payment to make, it’s not such a difficult tasks, so forgetting about it is quite impossible.


Read the numbers, before jumping to consolidate your loans:

  • create a spending journal and keep a budget – at least for 30 days, write now EVERYTHING you pay for or earn. This will allow you to clearly see your financial state.
  • see if you can save some money – having an emergency fund will save you from getting into additional debt, should something occur (accident, medical bills, house repairs you need to make etc.)
  • list all your debt and see if you can make automatic payments – many consider debt consolidation to be a great way to solve their debt problem, since they don’t have to manage more than one payment per month. It’s easy to get distracted and start missing payments, so one payment is always better than more. Yet, if you automate your payments, it’s irrelevant how many they are. Just spend few minutes in your online banking account and see what you can automate there.
  • look at all these numbers and then you can make an educated decision.

When is debt consolidation right for you?

While debt consolidation might not work for someone who’s still not too deep in debt, it can save you, financially, if you encounter the following problems:

  • are consistently late with your payments
  • you can only pay minimum on credit card bills
  • you need to borrow money to pay for regular expenses: food, gas etc.
  • more than 20% of your paycheck is used to pay off debt (excluding mortgage)
  • have several credit card balances, some at high interest rates
  • collection calls for overdue bills are something usual
  • cannot save any money and lack any emergency fund
  • you see no way to stop being broke
  • cannot negotiate a lower interest rate with your creditors
  • are almost bankrupt

If you have no wiggle room to aggressively pay off debt, have no emergency fund and constantly struggle to make your monthly payments, then debt consolidation is the breath of fresh air you need.

This would allow you to get a smaller monthly payment to deal with, while freeing up more cash to establish an emergency fund, as advised by Dave Ramsey, and recovering from all your problems.

You will be in debt for longer and pay more at the end, but at least you won’t have to deal with collection calls, won’t be late with payments and would be able to get financially independent one day.

What’s your take on debt consolidation? Have you used this strategy to get out of debt faster? Would you think it can work?

1 COMMENT

  1. Hi Ramona,

    Good post and the scary thing to do is get A personal loan to get all of your credit card debt wiped out but then you go ahead and start racking up your cards again. I did that once upon a time and never again.

    I’m a tweeting this.

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