Simplifying Payments Isn’t Always So Simple

When folks start working on getting out of debt, a debt consolidation loan often seems like a good idea.

It makes sense on the surface, especially if you can get a relatively low or no interest loan. Why not just lump everything together so you can make one big payment each month and be done with it?

Logically, consolidating debt means that more of your payment will be going toward principal each month, allowing you to pay off your debts faster. You’ll also reduce the chance of late fees, since there will only be one payment to make.

There’s just one thing wrong with that theory, and it’s a biggie: People don’t always act logically. If we did, we wouldn’t pay thousands of dollars over the years for things we probably don’t even remember buying.

Usually the problem with debt is NOT high interest rates and late fees — those are just the things that hurt. They’re symptoms.

If you have non-medical debt, the real problem is that you’ve been living above your means for some reason. And if you’ve been living above your means, consolidating debt is almost certainly going to put you even deeper into debt — no matter how well intentioned you are.

You’ve got to fix the underlying problem first. You have to stop borrowing money. Period. For any reason.

Borrowing money is not the solution. It’s just something you’ve gotten used to doing almost automatically. The next time an emergency happens, pretend that no one will lend you money, not even the credit card companies.

What would you do then? Do that thing instead and break the cycle.

Once you’re consistently living below your means and scraping up extra pennies to throw at debt, then a loan to lower your interest rates might be beneficial.


  • Chris

    We were considering doing a “debt consolidation” by transferring 2 card balances to a different card offering both a low (2.99% APR w/3% fee) and no interest (0% APR w/4% fee) option, as part of our debt snowball. The problem was that at our current balances, rates, and estimated payoff date neither transfer made any sense to do because of the combination of the transfer fee and APR versus the current APRs. The difference was on the order of $0.25, but why pay a quarter for the privelege (hassle) of transferring the balance and having a single payment when we can leave it where it is and knock it out in the same amount of time with the small burden of making a separate payment to a different institution (that we’ve been making all along).

  • You’re totally right about people needing to treat the underlying problem rather than just treat the system. Many of us look towards any solution but the most obvious to solve our money woes.

    While training for my new job yesterday I was part of a conversation with two coworkers who were lamenting about their low-incomes and considering transferring to more lucrative, higher stress positions within the company. They continuously made veiled comments about not being able to “get by” or “pay the bills.”

    Both owned cars and iphones – neither of which are requirements for employment in this company. I really had to bite my tongue to resist pointing out that no matter how much money these two made, their debt problems were obviously not related to income, but habitual over-spending. Earning more to get out of debt makes sense logically, but humans are anything but logical!

  • Another idea would to be to consolidate and immediately deal with the problem. For example, if you’re a credit card addict, consolidate and shred all the cards.

    Wouldn’t that help more – to work on the real problem while the “symptoms” don’t just build up in the background?

    • Budgeting, yes, that would be the logical thing to do, and it would help more — if people were actually good at doing it. I’m pretty sure that no one thinks they’ll consolidate their debt and then go out and run up the credit cards again, but what is they say about good intentions?

      At any rate I don’t think working on the problem has to take years or something. It could be just a couple of months of knowing that you’re really done with debt. There wouldn’t be all that much interest built up in a few months in most cases.

  • I have to agree with you, we have to stop borrowing and think we don’t have anyone to rely on except ourselves. That way, we learn how to earn extra income rather than relying on credits.