One of the most popular and highly advertised options for individuals looking to eliminate their bills is to consolidate their debt. This is normally* done by applying for a loan and you (the borrower) pay off the multiple accounts; leaving you with only the loan to payback.
So, What’s the Problem?
The biggest problem with consolidating is that it many cases it does more harm than good. Too often we hear of individuals who get in more debt after they consolidate (something that these consolidation agencies know) resulting in an overall worse financial situation than they were in before. However, some people can and do benefit from consolidating their debts and if that is something you are considering we have only two reasons why consolidating would be worth it:
Two Reasons You Should Consolidate your Debts
The biggest benefit of consolidating your bills is the peace of mind of having only one monthly payment. Rental or mortgage payments, car payments, student loans, credit cards…these bills can be very difficult for an individual or family to keep track of every month. It is estimated that the average individual has 13 credit obligations in which 9 of those are likely to be credit cards (wallethub.com). From this aspect consolidating is great because it reduces the probability of making a late payment by shrinking the number of sources you need to pay. So, if you habitually make late payments or find it difficult to remember those bill due dates; then consolidating might be right for you.
Another benefit of consolidating your bills is the potential to save money on interest and fees. Paying interest is what keeps you in the cycle of debt. Think about it, if you already have difficulty paying off the balances on your debts the interest and fees that lenders may charge will not help your situation. However, by consolidating you can payoff those higher interest bearing cards allowing (assuming your new loan is at a lower interest rate) you to save money off the interest alone. [Be warned though some companies do not want you to pay off your debts too quickly and may charge a prepayment fee. This is usually more common with mortgages but it is something to be aware of]. So, if you are paying extremely high interest rates then consolidating may be beneficial to you.
Is Consolidating Right For You
Remember just because consolidating is the popular option does not make it the best option for you. Consolidating your debts can be beneficial in certain cases however it is not a miracle strategy that will permanently clear up your finances. One of the biggest problems we see is that people clear the balances on their credit cards only to max them out again making the situation worse. At the end of the day you are not lowering your debts. You are simply moving money around to simplify paying off your debts.
*Another way to consolidate is to have a company act as a liaison and make payments to them. Then that company makes payments on your behalf to your multiple accounts. We do not recommend this option.