Debt Consolidation Explained

Debt Consolidation Explained.

Debt consolidation is just a fancy way of describing on gathering all your bills together and then getting one big loan to pay them all off, so you’re making one payment instead of many payments.

For example: You have a car loan and three credit cards, all maxed out and all with different and varying interest rates. What the consolidation loan does is loan you the money to pay off everybody and the interest rate can be lower or the term of the loan longer which could lessen your monthly payments.

I’m not a big fan of consolidation loans for a few reasons and the first is you’re just borrowing from one debt to pay off another. At the end of the day you are no further ahead.

And in my example above, you now have three empty credit cards that are real tempting to use and before you know it you’re back in credit card debt again, oh but this time you have the consolidation loan too.

Consolidation loans can be dangerous in the wrong hands. Unless you cancel the credit cards and live a cash only existence you are just asking for trouble. You are much better off paying off your debts without the help of consolidation loans, and here’s why: you learn how to manage your credit and get out of debt.

That’s the real value in that when you do the hard stuff, and move to a smaller house, get rid of the car or do whatever it takes and how ever long it takes to get out of debt on your own. You become a better money manager along the way, and you learn to live without the crap that you thought you needed.

Nowhere does it say that you need to eat at a restaurant, or drive a fancy car. You need to have food and shelter. The rest is just extras and comforts. And getting out of debt on your own is a lesson in itself, and for the most part, just a few habits need to change and you will be absolutely amazed at what can happen.

But I wont’ lie: Unless you have a stroke of good luck with the lottery, you will not be out of debt tomorrow. And it will suck when you really want that mid afternoon specialty coffee but boy oh boy that five bucks could go towards the debt.

And getting out of debt on your own teaches you all the stuff that a quick and easy debt consolidation loan doesn’t. A loan teaches you how to transfer debt to debt. Perhaps the terms of the debt might be more appealing, but that is the only advantage I can see with a debt consolidation loan.

Get out of debt yourself without any debt consolidation, and you will realize that the loan would have been a band-aid, and not the cure. The only cure is true and total debt freedom.