Why debt consolidation doesn’t work
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.
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.
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.
1 Larry Burkett