Why Debt Consolidation Doesn’t Work

You’ve probably seen the commercials, whether it be on TV or the Radio. A man in a nice suit tells you how he can “pay off” all of your debts. He will tell you about how he can get rid of your multiple high interest payments and give you one low easy payment. It makes it seem like getting a debt consolidation loan is the answer to all of your problems. After you get passed the flashy commercials, you will find that they really do not have a whole lot to offer.

Basically, they will write a check to pay of all of your consumer debt, and then give you a new loan for all the checks they wrote. Usually these debt consolidation loans are second mortgages, which allow them to offer interest rates of about 8% or 9%. There are a number of problems with these type of loans, and are really just not worth your while.

The biggest problem with them is that they do not change your behavior. Debt is not the problem, rather debt is the symptom. The problem is that you are spending too much money, and getting a debt consolidation loan does nothing to stop your overspending habits. So you pay off your credit cards with a debt consolidation loan, and end up just going back into debt because you have a bunch of credit cards with a zero balance and a huge spending problem. It’s just not the solution to your financial problems.

Most of the time you won’t even get the great loan that they present to you in the advertisements. That’s the teaser rate for people with the best credit, but if you have all sorts of debt and need a debt consolidation loan, you probably won’t have the absolute best credit score and will get a less than decent loan. Often times there will be a number of hidden fees which they will use to get a lot more money out of you than you had expected.

Another problem with the loan is that your debt will moved from an unsecured loan to a secured loan. Before they could only yell and scream at you if you didn’t pay your debt, and eventually sue you after many years. Now since it’s a second mortgage, if you don’t pay your debt, then they can take your house from you. You are adding collateral where there was none before.
The solution is simply not debt consolidation, rather the solution is getting very intense on paying on your debts, and eliminating them. Taking care of a few points of interest really won’t do anything. You think you did something, but in reality, you did not. Don’t bother with debt consolidation.