Question: What are your thoughts on debt consolidation?
Answer: This is gonna be a long one! For those that don’t know, debt consolidation is when you take all of your debts and roll them into one lump sum. Folks usually go this route to get a lower payment or interest rate.
In my opinion, the concept is worthless and should be avoided.
For example, let’s say I have 4 different loans with minimum payments of $150 at 15% interest, $190 at 12%, $110 at 14%, and $200 at 13%. My current minimum payment for all four cards would equal $650 per month. The debt consolidation company may tell you that they can lower your total payment down to $400 per month at 10% once they negotiate with your creditors and roll everything together. “Wouldn’t it be smart to save the $250 per month and get a lower interest rate” they’ll ask?
Here’s what they don’t tell you: usually you will pay on the loan much longer and end up paying much more as a result despite the lower monthly payment.
I mean, they DO have to make money somehow, right?
What tends to happen with debt consolidation is, the person responsible for the debt never gets on a written plan, and, consequently, never learns to control their money. This leads to that $250 per month being spent elsewhere instead of being saved or thrown at the existing debt. As a result, the cycle of using debt instead of paying cash continues, and new debt starts to pile up with existing debt.
(And I don’t even have the energy to discuss the scam that is debt settlement today.)
What you have to understand is: Debt is not the problem. Debt is the symptom of a problem. The real problem is the habit of under-saving and over-spending, and until you get that under control, you’ll always find yourself struggling to remove debt from your life. You can’t get out of a hole by digging out the bottom.
The absolute best way to get out of debt is to change your habits. A few ways to do this are:
Commit to living on less than you make.
Get on a written budget.
Invite accountability into your life
It’s a difficult process, but it’s a journey worth taking. For help with creating a personalized plan to get out of debt, book an appointment with a Certified Financial Trainer at the link below.