If you are struggling with lots of debt from a variety of credit cards or other consumer loans, combining that debt into one large consolidated loan can help you to get things under control. However, if you aren't careful, you can get yourself into an even worse situation than when you started.
Consolidating your various sources of high interest debt into one large package at a lower interest rate has several very attractive benefits:
For all these reasons, debt consolidation sounds great, and for a lot of people it is an excellent option. However, you need to be careful or you could end up in trouble!
Although most people consider a lot of debt to be a problem, I'm going to tell you that it isn't. Sure a lot of debt is bad for our finances, but debt is often a symptom of a different problem and not a problem in and of itself.
Excessive debt is usually a symptom of poor financial planning, impulsive spending habits and succumbing to societal pressures. Of course not all people who end up in debt are impulsive. Sometimes bad things happen and a lost job or an illness requires a loan to cover short term emergency expenses.
A lot of times though, debt just creeps up on you without you realizing. If that's the case with you, then be careful. A debt consolidation loan might help you to pay off your existing debt, but that debt is just a symptom of a bigger problem. The bigger problem is your spending habits.
Debt invariably comes from spending more money than you earn. Unless you can fix that problem, you'll never be able to get out of debt.Let's say you take out a debt consolidation loan to pay off all your credit cards and other consumer loans. Great. Then let's say you proceed to find yourself tight for cash due to your new debt consolidation repayment requirements. All of a sudden, that paid off credit card starts looking pretty tempting.
If you go back to using your credit cards or other types of consumer loans to cover routine expenses, you'll be getting yourself into a hole that will be almost impossible to get back out of again. Not only will you have a big debt consolidation loan, you'll also have those same old credit cards to worry about again.
You need to get your spending habits in line with your income. Period. You need to stop thinking of credit cards or payment plans as viable options for buying things before you have the money to pay for them. If you can overcome that problem, then you might be a candidate for a debt consolidation loan.
Just remember, a debt consolidation loan is not a miracle cure. At the end of the day, you still need to get your cash flow under control. Otherwise you're just treating the symptom when you should be treating the cause.