Today we thought we would take a look at something many people in financial problems consider – a debt consolidation loan. The premise sounds nice, even sexy. You go to a bank, get a loan to pay off all of your debt, and the interest rate on the loan is lower than your average interest rate on all of your debt which saves you money.

Debt Consolidation Benefits

• One monthly payment instead of many reduces the complexity of your financial life as you only have to track and pay one account. This lessens the chances of accidentally paying a bill late because you have to keep up with so many different accounts.
• A lower interest rate means you will save money in the long run as you will be paying less interest on your debt and your monthly payments should be reduced.
• A smaller monthly payment means more money in your pocket each month. If you are on a tight budget or struggling to keep up, this benefit alone makes debt consolidation appear worth it.

Debt Consolidation Drawbacks

• More disposable income can lull you into a false sense of security. With the debt consolidation loan lowering your payments to the point that you actually have a little money to spend you can begin to feel as though you aren’t in bad financial shape.
• Empty credit accounts that were paid off with the proceeds from the consolidation loan can prove to be to strong to resist for many. The whole I’ll just charge this new iPhone because I have to have it and I’ll pay it off when the bill comes is how you likely got into trouble in the first place.

Is It Really Just Delaying the Inevitable?

In many cases it is. Even though the benefits outnumber the drawbacks, and the two drawbacks at first seem to be benefits, for many people in financial trouble the consolidation loan doesn’t treat the core problem.

If you are in dire straits, you most likely got there as a result of a lot of bad financial decisions made over time. Giving you a lower debt payment and empty credit accounts  only treats the symptoms and not the root cause, which is your lack of ability to handle your finances that got you in a financial mess in the first place.

People who consolidate their debt often wind up with the consolidation loan and credit cards that are maxed out again, effectively doubling what they owed before the consolidation. In fact, most money management courses will tell you to stay away from consolidation loans until you have spent a couple of years adhering to a strict financial regimen to prove that you are able to handle your finances before applying for a consolidation loan.

If you find yourself in debt due to illness or job loss, then debt consolidation may make sense for you if you have sound money management skills. The loan may make the difference between going under and making a full financial recovery.

Only you know which camp you fall in, so make a smart decision because your financial future hangs in the balance.

Photo by eric731

Related posts:

1. How NOT To Get Screwed on a Debt Consolidation Loan
2. The Dark Side of Debt Consolidation
3. Is Credit Card Debt Consolidation the Right Move?
4. Debt Consolidation Services: What You Need To Know
5. What is Debt Consolidation, Anyway?