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Debt Consolidation Tarpit

Aug 18, 2007
Many people look at debt consolidation as an attractive option to free up cash and to help them get out of heavy debt. The premise sounds nice. You simply take all of your loans, combine them into a big loan with a lower monthly payment and life is beautiful from there on out.

The problem with debt consolidation is that it usually is a series of poor decisions that led to the need to consolidate in the first place. Until you solve the underlying issues, debt consolidation is likely to be a tar pit that just sucks you in deeper. In a few years you are likely to be in worse financial shape than you were before the debt consolidation loan.

The other thing to remember about debt consolidation is that it often spreads your payment over a very long period of time. Sometimes up to 30 years. The offer you lower payments because you will be paying for so long. For a home, a 30 year payoff might be fine--the home will probably still have some value at the end of the period. However, paying for 30 years on credit card debt or a car just doesn't make sense.

The problem is that any time you are paying on something beyond its useful life, it isn't sustainable. There is a reason that automobile loans are only for 4 or 5 years. People generally don't keep a car for longer than that. If you consolidate your debt and agree to pay on your car for the next 30 years, what are you going to do when you need a new car 10 years from now? Sure you can take out another loan, but you'll be paying on the first car for another 20 years. 10 years later, you'll still owe 10 more years on the first car, 20 years on the second, and you'll probably need another car. An most people don't drive a car for a full decade. You can see how easy it is to use debt consolidation to get further and further into debt. If you income grows by 10% each year, this might be sustainable. But for most people it isn't. In fact the only way it would be sustainable at a 10% increase is if you don't up your standard of living each time you get a raise.

The point is that debt consolidation doesn't fix your problems if your spending is out of control. It will merely delay the inevitable.

And don't think that just because someone is offering you a consolidation loan it is a good idea. Most of these lenders will eventually sell the loan to someone else, so they really could care less if you pay it off or not. Also the people putting the loans together get paid for signing you up--not based on if you can afford the payment over time.

If you need a loan, go to a bank and tell them what you are looking for. A local bank is going to be much more honest about how much money you can realistically pay off than a debt consolidation firm.

There may be some places where debt consolidation makes sense. For example, if it is the only way to stay out of bankruptcy and you have no other option it might make sense, but only if you also change your spending habits and start some serious financial discipline. If you don't you'll probably find yourself in the exact same position, but on a greater scale in just a few years.

Most people don't get into a position where they need a debt consolidation loan on accident. It is caused by poor financial decision after poor financial decision. If you want to keep control of your life, you need to make good decisions--even if that means not having everything you see your friends with. You don't know their financial situation and it is very likely that they will some day pay dearly for their lifestyle today.

Debt consolidation is not an easy out. It is a very expensive option and can keep you in bondage to debt for the rest of your life. If you think you need to get a consolidation loan, be very careful to make sure that the situation that made you need a consolidation loan in the first place has been fully resolved. Otherwise you are just compounding your problems down the road.
About the Author
Please visit Debt Consolidation blog to find out more about debt consolidation using your credit cards and other debt consolidation topics.
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