Many individuals believe that debt consolidation can save them interest, create a lower payment, and save them from all of their financial problems. Many financial advisors and experts believe that debt consolidation is similar to putting a band-aid on a bullet wound. It may treat the symptoms, but when the bandage comes off there is still a major problem. When you use debt consolidation, your debt does not go away but rather moves from several creditors to one. You cannot get rid of debt by borrowing money to pay off one debt by establishing another debt. Financial author Larry Burkett says that debt is a symptom of overspending and not saving enough money, and the focus should shift from short-term fixes to long-term solutions.
Debt Consolidation Statistics
One debt consolidation company estimates that 78 percent of customers who use debt consolidation go into debt again. The reason is that debt consolidation does not teach the consumer how to better manage their finances; it simply consolidates different debts into one big debt. In many circumstances, debt consolidation offers a lower monthly payment because the term of the debt consolidation loan is longer. In essence, the consumer ends up paying more with the debt consolidation loan than they would have without the debt consolidation.
Debt Consolidation Example
Sometimes using an example is the best way to illustrate how a debt consolidation may cause more harm than benefit. If your debt totals $40,392 with current payments totaling $2,200 and a debt consolidation lowers the payment to $640 per month at an interest rate of nine percent, it seems as if you’re saving $460 per month. What you’re missing is that now you have six more years to pay on the debt consolidation. Six additional years amounts to paying $46,080 instead of the t$40,392 you originally owed.
The Real Way to Get Out of Debt
Rather than turn to debt consolidation as a solution to your financial woes, it is more important to create a financial plan that deals with the true issues at hand—spending more money than you can afford rather than saving. Rather than debt consolidation, come up with a plan to change your spending and saving habits. As you formulate the plan, put it in writing so you can stick to it and accomplish your financial goals. The plan may include spending less money than you make or taking on a second part-time job to pay off the debt. While there are answers to your debt problems, debt consolidation may not be the best option.