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Debt Consolidation – is it a trap?

Did you know that debt consolidation can be a trap?  Why?  Because you may  be in debt for longer, end up paying more and you may be only treating the symptom of your debt – not the cause.

Let me explain.

Debt consolidation companies will recommend consolidation claiming it will make it easier to pay off one single debt and you will save interest.  But the truth is that the debt is still there and the length of time you take to pay it off may mean that you end up paying more in interest over time; even though the interest rate of a consolidation loan is lower.

Some people get into unmanageable debt because of an unforeseen circumstance such as a reduction in or a loss of employment.  But unmanageable debt is often an indication of spending beyond your income and not saving enough for a rainy day. 

Because of this debt consolidation may not solve your problems.  A high percentage of people who take out debt consolidation loans say that over time, the debt grows back.  This is because the debt consolidation loan has not addressed the habits of the borrower.

For people who are in trouble with debt, debt consolidation may seem attractive because there may be a lower interest rate on offer and therefore a lower single payment to be made each month.  The trap here though is that the payment is lower because the duration of the loan has been extended.  So for you this means that although your monthly payment is lower – the time you take to pay it off is extended and the longer you stay in debt, the more you ultimately pay the lender.

If you find yourself in unmanageable debt and are considering your options,  there are a few things to think about:

  1. What are the circumstances surrounding your debt?
  2. Did your debt arise because of your poor spending habits or circumstances outside of your control?
  3. What are the alternatives to debt consolidation?
  4. You cannot borrow your way out of debt

Help is available and there are debt experts who can help you find the best option for your circumstances.

To address unmanageable debt in the long term, your best bet is to develop good money management habits.  Commit to a written budget and stick to it.  Your expenses should be lower than your income.  If your income is not covering your essential expenses, look for additional income through a second job or a better paying first job. 

For more information on how to make a budget and tips to stick to it, see Financial Management Budgeting.