Is debt consolidation right for you?

A couple of days ago I was asked by two different people about debt consolidation loans. I will state up front that I have used a debt consolidation loan in the past. The process of getting the loan was easy (because my credit was good), it was very organized (because the business has been around for quite a while), and I immediately felt a lot better about my financial situation (because I didn’t know any better).

I am sure there are people out there that have gone through debt consolidation loans and everything worked out very well. I would say that if that is you, then you are the exception not the rule. For most people everything that is wrong with debt consolidation begins a month or so after you complete the deal.

First, let’s look at why debt consolidation loans are so attractive. All of these benefits are offered in a general sense. There may be some outliers, but for the most part, the following list is what is promised and what draws people into the debt consolidation trap.

1. you will have single loan rate that is lower than the average of the debts you are consolidating
2. you will have a single payment that is lower than the sum of the payments you are consolidating
3. you will be working with a single creditor – often a bank – instead of credit card companies
4. you will have extra money each month, to do those things that make you happy

After reading that list again, I can really understand why so many people use the debt consolidation as a means of managing their financial picture. However, the problem isn’t what is on the list, the problem is what is left off of the above list. The problem is what gets people into trouble in the first place – overspending.

People that need debt consolidation loans are people that have more debt than they can (reasonably) pay back. They have either dealt with an emergency situation that caused them to borrow money (because they didn’t have an emergency fund) or they simply have been living a lifestyle that exceeds their paycheck. Either way, the one thing that gets most people in trouble with debt consolidation is lack of discipline.

Not having creditors calling anymore, not having to worry about which bill to pay, and the feeling that you are finally on the right track to getting things under control is all an illusion. Unless you have dealt with the overspending that caused you to need the debt consolidation loan in the first place, it is very likely that you will continue with the same lifestyle. That lifestyle will in just a few short months look like three credit cards with a monthly balance and you wondering what just happened.

So what should you do? Run! Run away from the idea that a debt consolidation loan is a wise decision. Run away from the lifestyle that is out of control with spending. Run away from the friends that aren’t looking out for your best interest…and while you are running, look for someone that will hold you accountable for your decisions. The best alternative to a debt consolidation loan is a budget and if necessary a second (temporary/part-time) job.

Financial freedom is possible, without debt consolidation. Either way it will take time, but the first step must begin with a decision to start living on a budget that is designed around your actual take-home pay. Don’t think that borrowing money is the way to get out of debt. That is the plan the government is on right now, and look how that is working out for your tax bill.