What is Debt Consolidation, and How Can It Help You?

debt consolidation

When you are in debt, it can be difficult to know how to manage the situation. With so many accounts, and payments, and interest rates, it is easy to become discouraged. One way you can deal with this issue is to consolidate your debts.

Debt Consolidation

The process of debt consolidation is one that has been tried over time, and can be very successful. Basically, all of your debts are lumped together. Instead of making multiple payments each month, you make one payment each month. There are two main methods of debt consolidation:

1. Loan: A debt consolidation loan basically consists of taking one big loan, and then using it to pay off your smaller loans. You take out one loan, with a single interest rate, and pay off all your other debts. Now you only have one loan, and your interest charges are often lower than what you were paying with multiple loans, so more of your payment goes toward paying down the principal.

2. Third party help: With this method, you make arrangements with a trusted third party to help you consolidate your debt. This isn’t a loan. You work out a payment plan with the third party, and make a single payment to that company. The company then disburses payment to your creditors. Everything, from administrative fees to the third party to interest (often reduced) to the principal, is included in this single monthly payment.

Debt consolidation puts all of your debts together so that your debt is easier to manage, and you can more easily tackle it.

How Debt Consolidation Helps You

Now that all of your debt is in one place, you can begin to make real progress on paying down your debt. In many cases, more of your payment goes to your principal each month, so you are able to pay off what you owe faster. Your monthly payment is also often a little lower, so it can ease your cash flow problems.

Additionally, instead of trying to keep track of multiple debt payments, you only have to worry about one. This simplifies things greatly, and reduces your stress. Another stress reliever is the fact that you can see progress, and a debt consolidation payment plan lets you see an end to the debt.

You Have to Make Changes

A debt consolidation is only the first step, though. You have to make changes to your spending habits, and look for ways to reduce your expenses and/or earn more money if you want lasting financial success.

The biggest pitfall with debt consolidation is that once everything is wrapped up in the consolidation, it feels as though you have “more money” available to you. This is especially true with a debt consolidation loan that often “frees up” your credit cards. Don’t fall into this trap. A debt consolidation only makes things worse if you immediately use your new freedom to spend back into debt, racking up even more obligations.

Remember that debt consolidation works best when you are committed to changing your financial habits so that you don’t get into debt again. Debt consolidation can help you manage your debt, and pay it down. But only you can ensure that you stay out of debt permanently.

Readers: What are your thoughts on debt consolidation loans? Have you ever considered using a debt consolidation loan to manage your debt repayment process?


    • Holly@ClubThrifty

      Holly@ClubThrifty 10/01/2012 7:19 a.m. #

      Good tips! And I agree you have to make changes or you will end up in the same position time and again.

    • Kurt @ Money Counselor

      Kurt @ Money Counselor 10/01/2012 7:36 a.m. #

      In my experience as a credit counselor, my observation is most people use so-called debt consolidation as a way to postpone, rather than attack, tackling their debt. Here's what usually happens: Credit cards are paid off with a debt consolidation loan. The debtor rationalizes that lower payments and interest will ease debt payoff. Then, because the core issue of spending beyond one's means has not been addressed, credit card balances rise again. In not too long the debtor's credit cards are again maxed out, plus now they've got a new loan to deal with--the debt consolidation loan. Their challenge has worsened, not improved.

      For people who hit bottom and genuinely want to SOLVE their debt problems, not merely kick the can down the road, the overwhelmingly best solution is most often a Debt Management Plan administered by a nonprofit credit counseling agency. Taking on new debt is almost never a means to solve a debt problem. Just look at the US government!

    • Tackling Our Debt

      Tackling Our Debt 10/01/2012 1:19 p.m. #

      @Kurt - A debt management plan that goes into depth about why a person needs to stop using their credit cards, instead of, like you mentioned, thinking that they now owe less so they can go use them again to spend more.

      Many years ago, we did something quite similar, meaning we refinanced our mortgage at a lower interest rate and because we had accumulated so much equity, we rolled our credit card debt into our new mortgage. We should have cut up the credit cards and just focused on paying the mortgage, but instead we did the opposite. There we were with a higher monthly mortgage payment with lower interest (that at the time we could afford) but then we racked up new credit card debt, which caused even more problems.

      No matter how a person works at eliminating their current debt they need to understand that the first thing they need to do is to stop spending what they don't have.

    • Kim@Eyesonthedollar

      Kim@Eyesonthedollar 10/02/2012 10:15 p.m. #

      Thankfully, I've never had to use a third party service. It is all about changing your ways. Getting a lower payment does not mean you have that much more to spend each month.

    • CF

      CF 10/05/2012 11:06 a.m. #

      My parents, unfortunately, have been "consolidating" their debt for years. It hasn't helped them knock much of it down though. :( Consolidating helps, if you have the desire to eliminate your debt. Otherwise, it just makes it easier to accumulate more debt again.

    • Tackling Our Debt

      Tackling Our Debt 10/05/2012 11:22 a.m. #

      @CF - I agree. It only works if people understand that they need to stop spending over what they earn, but unfortunately many of us don't until we are really stuck, or in my case, really scared.

    • Catherine

      Catherine 10/05/2012 2:51 p.m. #

      We're about to start with a DMP, it was the only way for us unfortunately. I racked the debt up due to school/tuition+lack of funding for post secondary and not b/c of any vast overspending (thank God). We had to make a budget that balanced and basically prove that we can live by it before we embarked on it (something we did anyway). There was quite the counselling session prior to starting the program. We`re a unique situation but I think they're great for the right person if they REALLY understand how it's going to affect their lives.


      MARLA MAC 10/30/2012 7:41 p.m. #

      I know what carrying a lot of debt feels like. My debt load was almost equal to my gross income at one point. I tried for years to learn the "logic" behind money, but it didn't help me out of my predicament. I finally found the missing pieces of the money puzzle... the psychological and emotional sides of money. Until I addressed those, my debt didn't go away.

      Because money was my biggest pain point in my life, and I learned to (finally) turn things around, I became a money coach to help others. Using a money coach is one of the very few options for people who have an unhealthy relationship with money can get on track in all areas... debt, spending, earning, etc. There is the education component (mentoring) combined with finding the root of your poor money behaviors (counseling) and someone to be accountable to (coaching).

      Once I nurtured my relationship with money, I paid off my debt (without credit counseling or a consumer proposal) and now have much healthier money behaviours.

      For those looking for an alternative, I encourage looking into a money coach. Working with a money coach is not recorded on your credit report like credit counseling, consumer proposals or bankruptcy. And, you can find long-lasting peace of mind with money. Just be sure you work with a money coach that looks at the emotional and psychological, not just the practical.

    • Tackling Our Debt

      Tackling Our Debt 10/30/2012 7:54 p.m. #

      Thanks very much for your comment!

      I think coaching and counseling is so important when it comes to working through issues with money. I started a program this past summer and it helped me see things from a different perspective, which was key to getting a good start on sorting out our debt.

    • Gee n Dee

      Gee n Dee 11/28/2012 3:43 p.m. #

      Have to agree with Kurt in my situation. Took out a consolidation loan in 2008 and found that I had more money to spend (on a gambling addiction) and now have a debt management plan to deal with the debt accumulated following that. Had excellent credit rating so was easy enough to get access to more, although that has all gone now of course. The addiction is gone but the debt remains and very little change occurred in my spending habits following the consolidation loan but they have now I'm on a DMP.

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