Is Debt Consolidation a Good Idea? What is the Best Debt Consolidation?

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-subprime mortgage crisis, post-COVID times, the whole world is trying to get itself out of debt before the whole merry-go-round stars turning again.

Adapted from an original article by Celia Roche

Hopefully, when the world is once again feeling confident enough to borrow to finance an overly lavish lifestyle -- in the immortal words of The Who -- we won't get fooled again. You’ll be wiser. You won't be taken in a second time.

Debt Settlement vs. Debt Consolidation

Debt Settlement is also referred to as debt negotiation, negotiated debt settlement, and sometimes incorrectly called debt consolidation. Debt Settlement means that your debt is negotiated down to a reduced amount and paid off in a lump sum.

If you're interested in this, see below:

Settlement is one of the most effective choices available to consumers. It’s a great choice if you have more debt than you can pay off in 2-3 years. It's also a good choice if you are experiencing a financial hardship, and you're falling behind (or about to be) on your monthly payments.

Why would creditors choose to settle debts rather than simply charge you interest and late fees over and over again? Creditors know that if you get into such a bad financial position that you can’t pay your monthly payments, not to mention the amount of money consumers pay in interest and promotional fees. That's why creditors are typically willing to settle for a lower amount, given your specific situation.

Back to Debt Consolidation ...

Good Debt vs. Bad Debt

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. The value of the property tends to rise quicker than your interest payments over time, hopefully. In any case, you always need somewhere to rest your head at night!

Similarly, Student Loan Debt is generally wise, insofar as it represents an investment in yourself. This investment will help put you on a good career path, the best of all investments.

Business Loan Debt can also be a good thing if you've done your due diligence. 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 Consolidation Loan Debt ...

Debt Consolidation Loans

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 encouraging you to consolidate your debts. The advertisements would have you believe that debt consolidation loans will make your life easier and cheaper.

The truth is that debt consolidation loans can be beneficial, but it’s certainly not a panacea. Debt consolidation is not a magic eraser. The debts still exist.

Worst of all, people tend to use debt consolidation loans 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 used wisely.

What is Debt Consolidation?

Here are the main ideas:

Debt consolidation is the act of taking out a single loan or credit card to pay off multiple debts.
The benefits of debt consolidation include a potentially lower interest rate and lower monthly payments.
You can consolidate your debts using a personal loan, home equity loan, or balance-transfer credit card.

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 expenses.

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.

What are the Best Ways to Consolidate Debt? Debt Consolidation Credit Card vs. Debt Consolidation Loan

You can use a debt consolidation loan to lump all your credit card debt into one loan with a, hopefully lower, interest rate. You can also consolidate all your credit card debt onto another, lower interest rate credit card. If possible, though, the debt consolidation loan is a better option than a debt consolidation credit card.

This makes sense as credit cards often have annual percentage rates well in excess of 10%, which is really high. Many loans are available with far cheaper interest rates.

Securing the best rate of interest to minimize your monthly payments is something of a no-brainer. The danger lies in the temptation of falling back into old, bad habits. And the cycle continues ...

Borrowing more money before paying off your debt consolidation loan. Don't do it.

What is the Main Downside of a Debt Consolidation Loan?

So here's the main downside of a debt consolidation loan ...

And assuming the debt consolidation loan interest rates you find are better than your existing rates, of course ...

The main downside of a debt consolidation loan is the psychological feeling that you’re somehow better off. Guess what? You aren’t. Don't fall for it.

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. This can be made worse by consolidating debts and borrowing more.