Why debt consolidation doesn’t work

November 14, 2006 at 8:18 pm 18 comments

By watching television just a few times a week, you’ll notice a number of commercials pushing debt consolidation loans. You can save on interest and get a smaller monthly payment. That sounds great! The truth is that most of the time debt consolidation doesn’t work. If you aren’t convinced by the fact that they are being marketed so heavily by these loan and mortgage companies, let’s go over why they don’t work and why they are a bad way to get out of debt.

Smaller interest rate.
Debt consolidation typically saves little or no interest because you throw your low interest loans into the deal.

Smaller monthly payments.
This is an obvious one–smaller payments equal more time in debt.

Truth be said, you cannot borrow your way out of debt. By borrowing money to pay off debt, you are simple moving your debts, no paying them off.

Why does debt consolidation not work even if the math works?
Because there was no change in behavior. “Debt is not the problem, it’s the symptom.1” Having no emergency fund, buying things we can’t afford and being out of control. If those things aren’t addressed, you can’t borrow your way out of debt. It won’t work.

Debt consolidation is America’s attempt at microwaving their debt problem. Most of the time, you pay off your credit cards with a home equity loan, don’t change your habits, and the credit card debt grows back. Now you have credit card debt along with the loan you took out to fix the problem.

Debt snowball
The quickest and best way we’ve found to eliminate debt is to use debt snowball method. How does the debt snowball work? It’s easy. Simply list your debts in descending order with the smallest payoff or balance first. (Some people prefer to list them by interest rate, but if you’re looking at building momentum, list by balance.) Paying the little debts off first will show you quick feedback and you will be more likely to stick to the plan.

**Edit**
I recently posted over at We’re In Debt that I have an Excel file with the debt snowball. So, I’m going to post it here for people to download as they please. I originally grabbed the file from Mr. Peanut.

Click here to download the Debt Snowball (Excel)

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1 Larry Burkett

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Entry filed under: Credit Cards, Debt Consolidation, Debt Reduction, Spending. Tags: .

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18 Comments Add your own

  • 1. MOMM  |  November 15, 2006 at 12:40 am

    Hi – Came here from a comment on We’re In Debt. Quick question – would you mind sharing the calculations you did on your debt snowball excel worksheet? I’ve got my numbers in there but duh, it would be sweet to see the changes automatically instead of having to use my calculator. LOL Thanks.

    Reply
  • 2. chaka42  |  November 15, 2006 at 4:29 am

    MOMM, thanks for stopping by. I added a link to the file in the post under **Edit**. Let me know how it works for you.

    Reply
  • 3. Kevin  |  March 25, 2007 at 9:49 am

    Debt consolidation can be really helpful – provided the reduced monthly payment and increase in disposable income does’t encourage new debt. Debt is really about discipline and ego.

    Kevin
    Debt Consolidation Advice – Free Report

    Reply
  • 4. John Roberts  |  September 22, 2008 at 5:48 am

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  • 5. I Know Debt  |  October 8, 2008 at 3:37 pm

    Debt consolidation may not be for everybody, but it sure helped me.

    Reply
  • 6. Debt Consolidation Bad  |  June 10, 2009 at 3:04 pm

    If you are doing research, use the internet to find a debt consolidation company. This is also a place where you can easily compare deals. It can save your time and effort.

    Reply
  • 7. Herry  |  August 26, 2009 at 7:41 am

    I think Debt consolidation would be the perfect solution for the people who need help for their debts.Debt consolidation is the most economical way to get out of debt, as instead of many payments to various creditors, the debtor will make only one

    Reply
  • 8. Herry  |  August 26, 2009 at 7:48 am

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  • 9. Debt Consolidation Blog  |  September 15, 2010 at 7:28 pm

    Great info on your blog for Debt Consolidation. If more people would visit blogs like yours and mine then more people would be living a debt free lifestyle. The info is out there and most are free, they just have to look!

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