This is a subject that people have vastly differing opinions on. Some people think debt consolidation is a great idea and others think the opposite. Personally, I can’t say that debt consolidation loans are a great idea for everyone. It depends on one’s financial situation and their personal financial psychology. By financial psychology, I mean the way that people think about money and how different financial situations affect their propensity to save, spend or invest.
Let me start off by defining what debt consolidation is. It’s not a wand that magically erases your debts. Simply put, debt consolidation is paying off multiple debts with one loan. Since it doesn’t magically erase your debts, why would you do it? Good question. The answer is simple. For most people, debt consolidation loans replace several higher interest debts, such as high interest credit card debts, with a single lower interest rate loan. Afterward, if the person continues to pay their debts off in a timely manner, they will save money. In some cases, a significant amount of money.
So, why wouldn’t you get a debt consolidation loan? Ok, this is where we enter “it depends” territory. Consolidating debts is a bad idea if:
- having credit cards without a balance would make you more likely to charge more on your credit cards
- you have poor credit (because people with poor credit have a harder time getting loans with good terms)
- you need the flexibility of paying less some months (because loans are set amounts)
- it is likely that you might default (because loans are secured debt that could lose you whatever secures your debt, unlike credit card debt, which is unsecured)
The bottom line:
Debt consolidation loans can be a great idea without being a great idea for you. So, if you’re thinking about consolidating debt, be honest with yourself and do some research first. When it comes to finances, you want to make smart choices tailored to your needs, not the needs of the average person.