By Celia Roche
If you’ve found your way to this website because you’re doing everything you can to free yourself from debt – then you aren’t alone. It seems that in these post-boom times, the whole world is trying to get itself out of debt before — no doubt — the whole merry-go-round stars turning again. But at least by the next time the world is feeling confident enough to borrow to finance an overly lavish lifestyle, you’ll have learned enough not to get taken in a second time.
That isn’t to say all debt is bad, by any means. Mortgage debt is generally ‘good’ debt in that it is backed by the value of your property which will tend to rise quicker than your interest payments over time and, in any case, you always need somewhere to rest your head at night!
Similarly, student loans are generally wise as an investment in yourself to help put you on a good career path.
And a business loan can be a good thing if you know where you’re going in an enterprise and why, and you’re prepared to really work hard. The other form of debt that can be good is a consolidation loan. But it isn’t always that simple. In an attempt to capitalize on this debt-free “craze”, you read and hear a lot of advertisements these days encouraging you to consolidate your debts – as if somehow this makes life easier and cheaper. The truth is that debt consolidation can be beneficial, but it’s certainly not a panacea; the debts still exist. And sadly, many people use consolidation as an excuse to go on living beyond their means. Anything that encourages this kind of reckless spending is, unequivocally, not a good thing.
Nevertheless, consolidating your debts most assuredly can be a great money-saving tip if you use it wisely. This is because most people with debts have a combination of credit cards, loans and/or overdrafts. Debt consolidation is, therefore, appealing as it reduces the administrative work and general hassle of staying on top of different debts. But more to the point, it should reduce your monthly outgoings.
In most cases, people consolidate their debts by converting all their loans to a single loan with a lower rate of interest from a single source provider. This makes sense as credit cards often have annual percentage rates well in excess of 10%, while many loans are available at far cheaper rates. So securing the best rate of interest to minimize your monthly payments is something of a no-brainer. The danger lies in the temptation of then borrowing more money.
So this is the main downside of a debt consolidation loan (presuming the rates you do find are better than your existing rates); the psychological feeling that you’re somehow better off. You aren’t. All you’ve done is to take the sensible decision to get the best interest rate deal you can on your debts; you still owe the money.
Furthermore, people in debt tend to focus on the interest payment rather than the total sum they owe – and this can be made worse by consolidating debts and borrowing more. So use debt consolidation to your advantage carefully; always seek the best possible rates and always seek expert advice.