Debt consolidation: Exposing the false beliefs of the financial world
Myth: Consolidating debt is a good idea and a great way to lower my monthly payments.
Truth: Consolidating debt works much better for the bank than it does for you.
The truth is, success in personal finance depends on what you do, not what you know. Consolidating debts makes sense on paper, but if you don’t change the behaviors and disciplinary factors that got you into debt, you’ll wind up even deeper in debt. If you don’t stop borrowing money and learn to hate debt, consolidating your debts just frees up more room to go deeper into debt. It happens time and again where families consolidate and get a lower payment, then turn right around and rack up more payments until they’re worse off.
And the banks know this is true. Why else would they market debt consolidation so heavily? But what about the lower payments for you? Well, here’s the part where the bank comes out ahead. When most people consider consolidating, they have several debts. Some have low interest rates while some typically have high interest rates. Some have low balances while some have high balances. Consolidating combines all the debts under one interest rate. So while you are probably saving interest on some of your old debts, you’re now paying more interest on some of the others.
The same holds true for the term length of the debt. After consolidation, you now are stretching your debts out longer and paying more in the long run than if you had paid off the debts individually. The bank isn’t offering you lower payments because it’s better for you. They’re stretching out the loan to get lower payments so you’ll take the deal and they’ll make more money. You’re much better off working the L.I.F.E. Ladder and working through the debt snowball to pay your debts off quickly and permanently.
Everywhere you turn there is another ad for debt consolidation or debt negotiation. Don’t rely on someone else to fix your problems. Get rid of your bad habits and instill good habits. Learn the difference between needs and wants. Learn to control your impulse spending. Learn to budget every month, and make your money work for you instead of you working to chase your money. The rest will follow.
– Matt Wegner
Matt Wegner is a personal finance, career, small business and leadership coach focused on teaching his clients the tools for L.I.F.E. (Living In Financial Excellence). Learn more about Matt at www.financialexcellence.net.