Is Debt Consolidation a Good Idea?

Many families are in a good deal of debt, but still seek the theĀ best personal loans. This includes student loans, car payments, and credit card bills. When you’ve gotten in over your head, there are opportunities to get some relief by consolidating.

However, before you do this, it’s important to know what a debt consolidation is and who would benefit from one.

Debt Consolidation

How Does a Debt Consolidation Work?

The mechanics of a debt consolidation are quite simple. It gathers all the debts you have and puts them into one loan. To be clear, you still owe the same amount of money, but instead of dealing with many creditors like Visa, Capital One, Sears, etc., you have just 1, which will save you time and money by itself.

With 1 payment, you also have just 1 interest rate. Let’s say you have the following:

  • $1,100 Visa: 24%
  • $6,000 Honda: 9%
  • $17,000 AMEX: 14%
  • $12,400 Sallie Mae: 9%
  • TOTAL – $36,500

A debt consolidation company takes the loans on by paying off the companies and holding the notes. If they offer a rate of 8%, that would be favorable, as it lowers all of the rates by 1-16%.

In a nutshell, a debt consolidation moves the debt from those 4 lenders over to this 1, and the rate should be favorable. If it isn’t, then you should shop for a better deal.

debt-consolidation

Who Should Get a Debt Consolidation?

The truth is that there are many people who get a debt consolidation, but shouldn’t. Why? Because when the Visa and AMEX they’d previously run up are paid down, they repeat the process and run them up again, creating more debt, as opposed to paying it off.

The person who would be the best candidate for a debt consolidation is the one who is going to use it as an opportunity to get out of debt faster, and not repeat the process with frivolous spending or foolish purchases.

For example, in the above example, the person now has no car loan. If this person was to turn around and trade in for a newer, flashier model with a loan, the consolidation is going to end up being a curse, not a blessing.

The fact that you’re reading this is proof that you’re no fool. Foolish people do not research personal finance topics. Rather, they believe what a salesman tells them, move forward with their advice (pitch), and then end up in more trouble than they were in before. By learning about the fundamentals of debt consolidation and then seeing the details of who is a good candidate, you are well ahead of the average consumer.