Debt Consolidation Loan - Helpful or Hurtful?

When it comes to consolidating debt, there are a lot of opinionated people out there that basically fall into two camps. The first says that consolidating is a good thing and saves you money while the other contends that consolidating is a bad idea as more often than not it gets people into deeper financial trouble.

I thought I'd take a look at both sides of the argument and give my own position on it afterwards.

Pro-Loan Consolidation

• Saves money by reducing average interest paid out.
• Reduces chances of accidentally forgetting to pay a bill.
• Allows some breathing room by reducing debt repayment

Those are the most common points made in the pro-consolidation argument, and the are all valid points. The average consumer credit card interest rate is currently 14.17%, but people in debt trouble are usually paying closer to 20% or more as they aren't viewed as great risks by lending institutions. So getting a consolidation loan at 10-12% could save some serious cash over the life of the loan.

And the convenience of making one payment instead of making payments to each creditor every month is one of the most cited benefits of debt consolidation loans. If you are paying eight different creditors, the chances of making one late are much greater than if you were just making one payment.

Anti-Loan Consolidation

The basic argument against loan consolidation is that it merely relieves the symptoms and doesn't treat the cause. It's like taking aspirin to relieve the pain from a broken arm without having the broken arm treated. It may stop the pain right now, but it is going to come back worse than before.

People who have credit problems have them for a reason. They don't make great credit decisions over the course of many years. What a loan consolidation does is reduce their monthly debt burden, creating a false sense of security while at the same time allowing them access to credit cards that suddenly have zero balances as a result of the loan consolidation.

It's easy to see where that can lead. Many people slowly start using the credit cards again and in a few years they are right back where they started from, only now they owe twice as much.

Pretty much all of the heavy hitter financial gurus out there today are opposed to consolidation loans for this very reason.

My Take

If you just starting out on the road to financial freedom, or are still fairly new to it, I would most definitely vote against debt consolidation for the reason listed above.

However, if you have several years of faithful debt repayment under your belt and you have become financially savvy and responsible, then debt consolidation is something you should look at, especially if you plan on using the money saved to accelerate the loan repayment.

In the end, it comes down to your own financial position and goals. I can't tell you what is right for you (unless you have still have debt problems, then I can tell you not to do it) but I would say that consolidation loans are probably better left alone by most people.