Why Debt Consolidation Isn’t a Magic Solution

debt consolidation

Debt consolidation isn’t a magic solution for your debt; it’s the first step on a long journey.

Debt consolidation has helped thousands of people get out of debt, and on paper, it’s easy to see why. Consider a debt consolidation loan, for example. You take out a loan that’s large enough to cover all of your debts. You pay them off in one fell swoop, consolidating them into this new loan. Ideally, this loan has a lower interest rate and monthly payment, meaning you save money both now and later. You then focus on paying off that loan to be free of debt. It seems like a simple, attractive solution to a complex problem.

Just because the basics of debt consolidation are easy to understand, though, that doesn’t mean debt consolidation is easy to make work. It isn’t a magic solution, and here are three reasons why.

1. Debt consolidation doesn’t give you a safety net

One of the major reasons why people fall into debt is because they didn’t really have a choice. By definition, debt spending is spending money that you don’t have. Sometimes, we need to spend beyond our limited means just to get by.

Take, for example, student loans. Most of us don’t have $37,172 (the average student loan debt load upon graduation) laying around to spend on education. Despite that, we know that getting a college education is essential to having access to more fulfilling, higher paying jobs. So, we borrow the money to pay for the necessity, sure that the extra pay we’ll merit will make it all worth it in the long run.

Often, it’s more immediate and dramatic needs that drive people into credit card debt. Imagine that your spouse becomes seriously ill and insurance can’t or won’t cover all of the medical bills. Imagine you wreck your car and can’t afford to get it fixed, leaving you unable to get to work. Imagine it’s the end of the month and you just don’t have enough money in your bank account to make rent and keep the lights on. These everyday emergencies often force us to take on high-interest debt that can snowball fast.

Consolidating your debt can help you make these types of debt more manageable, but it doesn’t prevent emergencies from popping up in the future. In other words, it’s not a magic solution preventing you from falling back into debt. If you’re serious about becoming and remaining debt-free, understand that reality.

2. Debt consolidation moves debt around, it doesn’t eliminate it

This is an obvious reason, but so obvious that it can be easy to miss. When you consolidate your debt, you’re just moving it around; you aren’t out of the woods.

It seems almost silly to mention since the very definition of debt consolidation is that you’re moving all of your debt into one place. You’re reorganizing to make your finances easier to handle.

However, we see firsthand at National Debt Relief that people engage in plenty of magical thinking when it comes to their hopes for debt consolidation. While they know intellectually that they’re just moving their debt around, they still tend to think of debt consolidation as a final solution.

Here are the facts, though: debt consolidation, in and of itself, is not a solution to debt. It’s not even a strategy for getting out of debt. It’s a tool and a tactic that you can use to give yourself some breathing room so you can figure out the best way to get your life back on track. It’s step one in a journey, not the destination.

Why are we so adamant about this point? The sad fact is this: many people who engage in debt consolidation never actually get out of debt. They seek out debt consolidation when they’re in over their heads and use it to take some of the pressure off. When the consolidation happens, they all of a sudden have a little extra spending money and a ton of freed-up credit. They don’t have a plan to pay off their consolidation or adequate financial discipline to hold back. After all, in the moment, everything feels like it’s under control.

What do they do? They spend. They take all of that freed up credit and use it up again. It starts small with a little here, a spontaneous purchase there, a treat for newfound financial freedom, but it piles up. Within a few years, they’re in debt up to their eyeballs again, and worse than before since they now have a debt consolidation loan to deal with. Not only will they need to go through the consolidation process again, it will be even harder to consolidate this time since they have an increased debt load and a history of bad financial behavior.

It’s an ugly situation, but it happens all the time. To avoid it, remember: debt consolidation doesn’t make your debt go away magically.

3. Debt consolidation does not change your spending habits

As we’ve already discussed, people fall into debt for a wide variety of reasons. It’s hard to give one-size-fits-all advice for getting out of debt.

We can say confidently, though, that there’s a constant in just about every single debt situation. You might not be able to control all of the circumstances in your life that lead you to want to spend using debt, but you can control how you respond to them. If you’re responding poorly or irresponsibly, debt consolidation won’t change much for you. It changes the organization of your debt, but not your spending habits.

In an emergency, you typically can’t do much. However, you can be more prepared in case something happens in the future.

If you drove yourself down into debt, though, you need to be prepared to change.

The main takeaway is this: debt consolidation may make it easier to deal with debt in the present; however, it doesn’t protect you from falling back into debt in the future.

How do you make debt consolidation work for you?

If debt consolidation isn’t a “magic” solution for getting out of debt (and staying debt-free), it’s still an enormously effective tool if you know how to approach it correctly. So, how do you make debt consolidation work for you?

Make a long-term plan for paying off your debt entirely

As we’ve already said, consolidating your debt is step one on a long journey toward becoming debt-free. If you stop there, you won’t get anywhere.

Instead, take an hour to sit down and come up with a realistic plan for getting out of debt. The first step in your plan should be dealing with the present. Do that by making a budget.

Start by opening up a new spreadsheet on your computer and listing out all of your income for the month. If paid a salary, then you probably know this number offhand. If you’re an hourly employee, it will be variable depending on how many hours you get, but you should be able to come up with an estimate.

Next, subtract your expenses. There will be fixed expenses (rent, car payments, etc.) as well as variable expenses (utility bills, groceries, etc.). Try to peg them to specific numbers and dates as best you can.

Whatever you have left is the amount you’ll have to make a move on your debt load. You can go two ways here.

On one hand, you can plan to pay the minimum monthly payments on your debt. If you received a decent interest rate with your debt consolidation loan then this might be the way to go. You’ll hit your payoff date and be able to stash away a little extra money each month.

On the other hand, if you want to get out of debt sooner, and you have other forms of debt besides the loan, you might want to devote extra money each month toward paying off your debts more aggressively.

To do this, most people choose a single debt to focus on and devote all of their extra funds toward paying it off. There are two schools of thinking in choosing the debt to target: the “debt snowball” and the “debt avalanche.”

With the snowball, you choose the debt with the lowest balance and devote yourself to eliminating it. You pay this debt off quickly and then use the additional funds to pay off the next-smallest debt, and so on.

With the avalanche, you choose the debt with the highest interest rate and work to pay that off first. This might take longer than paying down the debt with the lowest balance, but it can often save you more money in the end.

If you don’t want to use your extra funds to pay down debt, you should still be careful and responsible about how you spend. Treating yourself is fine, but building up your savings account is even better.

Understand why you fell into debt in the first place, and resolve to change

The most important lesson that you can learn from debt consolidation is figuring out why you fell so deeply into debt in the first place. By understanding why you got in so deep with your creditors, you can identify the behaviors that led you to fall into debt and resolve to change.

In some cases, there’s a single, easy-to-identify reason that you fell into debt. You crashed your car and couldn’t afford to get it fixed. You got sick and needed to cover your medical bills. The list of potential emergencies goes on.

In other cases, it can be much more difficult to point to a single decision and say that’s why you fell into debt. Often, debt is the outcome when someone tries to live outside of his or her means. You charged a new outfit, a new pair of shoes, a new gadget, and a night out on the town over the course of a month and a half. Alone, none of these decisions put you over the edge. Together, they created a debt load that was much more than you could handle.

Still, there are themes you can identify and change. Maybe you’re too free with your credit card. Maybe you can’t hold yourself back from signing up for a store credit card to get 20% off. Maybe you have a friend who is constantly pressuring you to go out and treat yourself regardless of the financial consequences; after all, isn’t life too short to be thrifty?

Be honest with yourself and figure out what really caused you to fall into debt; then, change it. If it was emergency spending, consider bulking up your savings account over time so that the next time something bad happens, you’ll be prepared. If it was irresponsible spontaneous purchasing, resolve to have more discipline going forward. You should also put some distance between yourself and your spending triggers. Hold yourself back from “just browsing” expensive stores or online shops. Set a limit for your leisure spending. Resolve yourself to only go out a few times each month, and once you hit your number, force yourself to say “no, thanks” when your friends try to negotiate with you. It might not be fun, but this kind of discipline is necessary if you’re serious about getting out of debt.

If you think you can handle all of this and make debt consolidation work for you, then now might be the time to research your options. National Debt Relief offers debt consolidation services to people in situations like yours all over the country. We’re proud to say that we really make a difference in people’s lives; check out our reviews!