Paying off debt is hard. Chances are that you have debts in a number of different places (car, student loan, credit card, and even perhaps medical or personal debts as well), all of which have different payment dates, rates, and amounts.
It can be overwhelming.
So when you hear of services that will consolidate your loans, it’s a tempting offer. They promise to give you one loan payment per month, eliminating so much of the administrative headache (and potential for things to go wrong) that come with multiple payments.
It sounds appealing. But is it worth it?
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Beware of sharks
I’ve long said that if someone is advertising something, you don’t need it.
Well, here’s a Google search for “debt consolidation”. Take a look at how many ads there are:
That alone is a bad sign, because it begs the question: “what’s in it for them?”
Now, I’m all for paying a fair price for a quality service. But what are you actually getting?
In short, a debt consolidation service will pay off your existing debts (usually only the unsecured debts), and replace them with a single (private) loan.
So right away you can see the appeal to vendors. Instead of paying interest to other companies, you now pay interest to them.
But maybe you don’t care about that. After all, you’ve got to pay to someone, and maybe it doesn’t matter who you pay.
And what’s wrong with a single bill?
Moving it around
The main issue I have with debt consolidation is that you haven’t actually done anything, at least as far as the debt is concerned. In rare cases, you can get your aggregate interest rate reduced, but normally, you’re paying the same thing over the same time, just in a different form. (And if these services charge fees, you’re actually paying more.)
So all you’re doing is affecting the administrative side of things. Which I admit is something, but the administrative side is the easiest to work with. For starters, you can automate your bills, ensuring you have enough float in your account to be able to have the bills be taken out without worry of overdraft.
All of the above are important things to do anyway.
No more snowballs
Another reason why debt consolidation isn’t a great plan is that it totally eliminates a benefit of having multiple debts: being able to utilize the debt snowball method of payoff. When you pay off a small debt, you not only gain motivation (because you see that you work is paying off), but then all that money can be rolled into the next debt, accelerating your payoff. It’s much better than a big mountain of debt, which can feel insurmountable.
So you remove administrative hassle, but at the expense of potential motivating behaviors. And now you have an unknown lender to deal with. Is that really progress?
A word about student loans
If you have multiple federal student loans, you can usually consolidate them into a larger debt. Often, you can get a small interest rate reduction when you do this. This market is highly regulated and feels slightly less predatory than the private market, so I don’t see a big problem with doing this. Just note that you still lose out on the benefits of the debt snowball. And again, you’re not moving the needle at all.
I myself consolidated my student loans when I graduated college. The 0.25% rate reduction made me feel like I was accomplishing something, though it was small. I never encountered a problem with my large payment, but it did certainly stick around for a long time.
If I had to do it over, would I consolidate again? Probably not, unless the terms were really favorable. I could have used the motivation of the debt snowball.
Don’t avoid the work
Debt is always hard to pay off. Companies know this, which is why they promote so many products that claim to help you with it.
But no company can do the hard work, which is actually paying off your loans. Only you can do that. Everything else is just moving money around. I’d much rather you focus your energies into doing just that.
But enough about me. How do you feel about debt consolidation?
