From my financial advisor:
Myth: Debt consolidation saves interest, and you have one smaller payment.
Truth: Debt consolidation is dangerous because you treat only the symptom.
Debt consolidation is nothing more than a "con"
because you think you've done something about the debt problem. The debt
is still there, as are the habits that caused it – you just moved it!
You can't borrow your way out of debt. You can't get out of a hole by
digging out the bottom. True debt help is not quick or easy.
Larry Burkett, noted financial author, says debt is not the problem;
it is the symptom. I feel debt is the symptom of overspending and
undersaving. Our financial coaches will not recommend debt consolidation
for a client. Why? Because debt consolidation doesn't work.
Debt Consolidation Statistics
A friend of mine works for a debt consolidation firm whose internal
statistics estimate that 78% of the time, after someone consolidates his
credit card debt, the debt grows back. Why? He still doesn't have a
game plan to either pay cash or not buy at all. He also hasn't saved for
"unexpected events" which will also become debt.
Debt consolidation seems appealing because there is a lower interest
rate on some of the debt and a lower payment. However, in almost every
case we review, we find that the lower payment exists not because the
rate is actually lower but because the term is extended. If you stay in
debt longer, you get a lower payment, but if you stay in debt longer, you pay the lender more, which is why they are in the debt consolidation business.
Debt Consolidation Example
For example, let's say you have $30,000 in unsecured debt, including a
two-year loan for $10,000 at 12%, and a four-year loan for $20,000 at
10%. Your monthly payment on the $10,000 loan is $517 and $583 on the
$20,000 loan, for a total payment of $1,100 per month. The debt
consolidation company tells you they have been able to lower your
payment to $640 per month and your interest rate to 9% by negotiating
with your creditors and rolling the loans together into one. Sounds
great, doesn't it? Who wouldn't want to pay $460 less per month in
But they don't tell you that it will now take you six years to pay
off the loan. This may not sound that bad to you at first unless you
realize how much more you will actually pay in additional payments. You
will now pay $46,080 to pay off the new loan vs. $40,392 for the
original loans, even with the lower interest rate of 9%. This means you
paid $5,688 more for the "lower payment." Not such a good deal after
all. This example shows you why they are in the business – because they make money off of you.
The Real Way to Get Out of Debt
The answer is not the interest rate; the answer is a Total Money Makeover.
The way you get out of debt is by changing your habits. You need to
commit to getting on a written game plan and sticking to it. Get an
extra job and start paying off the debt. Live on less than you make. It
is not rocket science, but it is emotional, which is why most people
need help getting through it from someone like Dave Ramsey. Don't try