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Is Consolidating your Debt a good idea?

October 11, 2011 18 Comments

Many people have different views when it comes to consolidating their debts. I believe that when you consolidate your debt, it is best to take a step back and consider your current financial situations. Are your credits in good standing? what’s the current interest rate that you’re looking for? are you in desperate need to consolidate? One important thing that many people fail to remember is that consolidating your debt is not actually getting you out of debt, it is just putting all of your debt into one loan. Now that you only have one loan, you’re thinking you don’t have to worry so much right? think again. Most who have this mindset ends up consolidating their loans and as a result, going back to their spending habits and maxing out on their credit cards again. This will create into a snowball effect where you think you got your financial situation under control but in fact, you’re digging the hole bigger and bigger.

Benefits of it…

If you are the other percentage of people who realize the responsibilities that comes with consolidating your debt through a bank loan, there are a few benefits that can result from consolidating. One of the obvious benefit is the convenience of paying just one monthly payment each month without having to worry about logging into different accounts and pay. You will end up saving so much more money in interest over the long run if you can lock in on a lower interest rate.

Bankruptcy?

There is but one word that most people fear and that is bankruptcy, it can cripple you. If you let your debts go out of control and not consolidate in time, you will have no choice but to file for bankruptcy. Once you go into bankruptcy, it can stay on your record for at least 10 years, it will be very hard to ask for loans and apply for mortgages. Your bad credit will even affect your car insurance no matter how good of a driver you are or how many accidents you had.

Your very own lifestyle must change if you choose to consolidate in order to prevent you from going back to the old habits. For example, see those credit cards in your wallet? cut them all up! If you have to keep one for emergencies then by all means keep it, but freeze it in your freezer down in the basement, this will help you from misusing it. The fact that you decide to consolidate your debt is the first step to recovery so remember to control your impulse and not make it worse but most importantly, never let money be your master.

What are your thoughts on consolidating? Is it a good or bad thing?

 

–Featured in Carnival of Financial Planning – Edition #206 – October 14, 2011

–Featured in The Carnival of financial Camaraderie #3

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Comments

  1. Doctor Stock says

    October 12, 2011 at 3:01 am

    Great post… it is not always a straight forward decision. When you’re trying to get out of debt, lower debt payments are a good thing… so, if that’s the motivation, go for it.

    Reply
  2. MoneyforCollegePro says

    October 12, 2011 at 11:55 am

    Most people do not realize this, but if you decide to consolidate student loans you will almost always lose your deferment and forbearance options. You will sign a new promissory note, and this new note will severely limit your options if you face difficulty in paying back your student loans.

    Just something to think about!

    Reply
  3. Funancials says

    October 12, 2011 at 1:09 pm

    Aaron-
    Not to be rude but there were so many grammatical errors, I nearly couldn’t finish. As for consolidating, it depends on the situation. If you’re consolidating higher interest credit cards into a low-interest installment loan, yes. If you’re consolidating a car loan and credit cards into a HELOC (w/ tax-deductible interest), yes. If you’re simply consolidating multiple CC’s into one giant CC at a similar rate of interest, there’s no benefit.

    Reply
    • Aaron Hung says

      October 12, 2011 at 2:06 pm

      Thanks Funancials, let me correct those grammars real quick I was a little sleepy while writing it 😀

      Reply
      • Funancials says

        October 12, 2011 at 11:02 pm

        Haha- no problem. Didn’t mean to call you out. Posting schedules can lead us late into the evenings.

        Reply
  4. retirebyforty says

    October 12, 2011 at 4:32 pm

    Yes, you should freeze the credit card in a cup of water and freeze it. That way it’ll be pretty tough to get out. 🙂
    I think consolidation is good, but you still need to make sure you can pay. The person needs to do a budget and stick to it so s/he can pay off that debt.

    Reply
    • Aaron Hung says

      October 12, 2011 at 4:45 pm

      It’s always hard to stick to a budget for most people as there is always something that comes up.

      Reply
  5. Beating Broke says

    October 13, 2011 at 2:55 am

    Consolidation can be a good thing. With one big caveat. Once you’ve consolidated those debts, you don’t accrue any more debt. Period. The second you do, you’re digging yourself a deeper hole, and you might not be able to get out of it.

    Reply
  6. Miss T @ Prairie Ecothrifter says

    October 13, 2011 at 7:00 pm

    Consolidation can be a good thing as long as you don’t fall into the cycle of constantly consolidating. It should be a one time solution. I used consolidation a few years back and it really helped me get back on my feet. Since then, I haven’t gotten into debt again.

    Reply
  7. Buck Inspire says

    October 13, 2011 at 10:50 pm

    Great message. Some folks could mistaken it as a silver bullet that solves their debt problems. The mindset toward spending must change. Hopefully one can consolidate to a lower rate and make it easier to manage from one account. That’s a win-win scenario right there!

    Reply
    • Aaron Hung says

      October 14, 2011 at 2:28 pm

      Yes, it only works if you have the right mindset and responsibilities. lower rate doesn’t mean anything if you’re spending more than you make

      Reply
  8. World of Finance says

    October 14, 2011 at 12:04 am

    A thorough analysis should be done before making the decision to consolidate or worse-yet, file for bankruptcy. It’s it still salvageable, perhaps a STRICTER budget is in order! Or a cash only diet, not to be tempted to spend unconsciously with plastic (debit or credit cards)!

    Reply
    • Aaron Hung says

      October 14, 2011 at 2:25 pm

      I believe bankruptcy should be the last resort before looking for other possible options. 🙂

      Reply
  9. My University Money says

    October 16, 2011 at 2:36 pm

    Before making any choices with large amounts of debt or investments I don’t recommend blindly following the advice of anyone (including a financial professional), but instead educating yourself!

    Reply
  10. Matt @Financial Excellence says

    October 26, 2011 at 1:07 am

    You’re exactly right Aaron – it’s all about the behaviors. If you don’t change the behaviors and money management habits that caused the debt, consolidation won’t help much.

    Reply
  11. Maria@moneyprinciple says

    November 14, 2011 at 7:53 pm

    We consolidated, and consolidated…Till there was no choice but to realise that we either get out of debt or continue consolidating…till we lose everything. The last consolidation was twenty months ago – from high interest credit cards to lower interest loan. Since then we have paid off over $80,000 – who said that being an obsessive is a bad thing :). We will never consolidate again – the time has come to build.

    Reply
  12. cashflowmantra says

    November 24, 2011 at 3:52 pm

    Consolidating debt is clearly a bad thing if not accompanied by a change in attitude toward debt and money.

    Reply

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