Debt: To consolidate, or not to consolidate?

Are you in overwhelming debt?

If so, you’ve probably considered debt consolidation.

Some experts suggest taking advantage of non-profit credit counselling and consolidating your debt. They say it can help you gain financial traction more quickly. Others claim that consolidations loans are financial traps that should be avoided.

Below, I’ll explain debt consolidation – in hopes you’ll be able make the decision for yourself.

What is debt consolidation?

Debt consolidation is simply rolling all of your existing debts into one large debt. After doing this, you’ll start to make one payment per month to one creditor.

There are several ways you can consolidate debt. For example, you can use any of the following methods:

Non-Profit Credit Counselling: Non-profit credit counsellors work with creditors to come up with solutions that satisfy both parties. For instance, a credit counsellor might work with your existing debtors to have your late fees removed and interest rates lowered. A credit counsellor will also help you create a budget, and many will have you send them one monthly payment which they will then disburse to your creditors.

Home Equity Line of Credit (HELOC): Another popular method for consolidation is to take out a line of credit through your home equity. This way, you can pay all of your debtors off and make payments on your HELOC, which normally comes equipped with a low interest rate.

Debt consolidation loans: Many banks have loans designated for debt consolidation. You’re usually required to put up collateral to take out one of these loans. If you don’t have collateral, you may be able to qualify for an unsecured loan — but these will come with much higher interest rates.

Other popular options are putting all of your debt onto a low interest credit card, or taking out a personal loan.

The pros of debt consolidation

Contrary to what some of the popular financial gurus claim, there are indeed pros to debt consolidation.

If you’re constantly being hounded by debt collectors, this is an easy way to get them off your back.

It also simplifies things: you’ll be making one payment to one creditor. Not to mention you’ll probably be able to get a lower interest rate than what you’re paying now (especially if you have credit card debt), and therefore you’ll have a lower monthly payment.

Lastly, if you work with a credit counsellor, you can have late fees waived and interest lowered — which lowers the total amount of money that you owe.

The cons of debt consolidation

Anybody who follows financial guru Dave Ramsey will recognise the following statement: “Debt consolidation is dangerous because you only treat the symptom.”

This is true: it does no good to consolidate debt, unless you’ve dealt with the underlying habits that caused you to get there in the first place. If you haven’t addressed those issues, you’re setting yourself up for a repeat failure. So, before consolidating your debt, make sure you’re committed to changing your financial ways.