I think debt consolidation can be a very smart and useful tool for people who are serious about getting out of debt. Debt consolidation is a process where multiple debt streams are combined into one payment, which, in theory, makes it easier to pay off, and under certain circumstances can give you access to a lower overall interest rate. In my counseling practice, however, I see a worrisome trend in consumers’ attitudes towards debt consolidation. I fear many see consolidating their debt as a trouble-free answer to their overspending. Here are items to consider in consolidating:
· To qualify for a debt consolidation loan, one needs to have a good credit score to get a low interest rate. Consumers who already have many debts may not be able to qualify, and their credit report gets hit with a hard inquiry.
· There are fees to taking out a consolidation loan, such as balance transfer fees, origination fees, and closing costs. Some of these loans also add annual fees.
· Paying less each month on debts is a way to catch up, but if you stay with the consolidated loan and pay the minimum each month, you will end up paying more as these loans stretch out the repayment timeline.
· Similarly, paying less each month creates the impression that one has more money. This can lead to overspending and deeper debt. To me, I see these loans not really dealing with the underlying issues of poor financial behaviors.
In conclusion, it is good to remember that debt consolidation is not a perfect solution in every situation, and people should heavily weigh their options before making any final decisions.