Should you consolidate your debt? After all, we all see the ads for debt consolidation all over the television, internet and print media, telling us that this is the answer. So it must be a good idea right?
Debt consolidation does have its advantages. It can help you to lower interest rates, reduce the amount of time it will take you to pay off the debt, achieve a more manageable monthly payment amount and reduce your monthly debt obligations to one easy payment. All valid reasons in their own right. But what I want to talk about here is the "one easy payment". How is it achieved, and what are the benefits if any?
First let's look at how this is accomplished. And to do that we need to understand the two different forms of debt consolidation. Yes, there are two.
The first way to consolidate your debt is by using a debt consolidating loan. In essence, you take out a new loan, and use the proceeds to pay-off your existing debt. The premise is that the new loan has a lower interest rate and a more manageable monthly payment obligation. And because this one new loan replaces all of your other unsecured debts, you only have to make one payment each month.
The second way of consolidating debts is through a debt consolidation/debt management program. With this type of program (offered through credit counseling agencies) your actual debts are not consolidated and you do not receive a new loan. What does happen is that the credit counselor negotiates lower interest rates and payments directly with your creditors which will ease your monthly debt obligations. And then each month you make one payment to the credit counselor who in turn pays all of your creditors on your behalf.
The goal of this type of debt consolidation program is
to have you debt free in under 60 months. And unlike a straight debt
consolidation loan, this type of program is supplemented with one on
one credit counseling to help you thoroughly assess your financial
situation and prepare a personal or family budget. This "supplemental
counseling" is often the most important part of the process and can be
the difference between success or failure when it comes to seeking debt
As you can now see, by using either of the methods above to for debt consolidating purposes, you end up having to make only one monthly payment. So the question becomes, "is this a good enough reason to consolidate your debts?". In my opinion no. On its own, the benefits of having to make only one payment each month are simply not worth it. Sure, one payment is more convenient, helps you stay more organized and focused, and may help you avoid missing a payment by accident, but on its own, this is not a good enough reason to consolidate your debt.
However, as part of the larger group of debt consolidation benefits that I pointed out above (lower interest rates, lower monthly payments, possible reduction of late fees and penalties), it would certainly seem to be something worth pursuing.