The Pros

• Lower Monthly Payment – This is the line that hooks most people to the idea of credit card consolidation. If you’re paying $1000 per month, and a company offers you $500, it’s hard to not think that’s a great deal.

• Lower Interest Rate – Especially if you’re going with a secured loan, debt consolidation can give you a much better interest rate on your debt. With a secured loan, you will use your house, car, or bank account as collateral.

• One Monthly Payment – Instead of paying various creditors, you will only need to worry about paying one. It’s easy to keep track of payments and hard to forget about.

The Cons

• The Risk of More Debt – When you choose to consolidate your credit card debt, your burden of debt may feel lighter. Because you feel less burdened by debt, you may be more likely to using your credit cards again, and dig yourself deeper into debt.

• Lose Your Home or Car – If you used your home or car as a security, and find yourself unable to pay back your loan, you can lose your personal property. Be careful, many debt consolidation loans are in fact home equity loans.

• One Monthly Payment – If you have a credit card debt with a higher interest rate, it may be best to pay that off sooner than those with lower interest rates. However, when you consolidate your debt, you cannot accelerate the payoff of one credit card over the other.

• More Money In the Long Run – Although many debt consolidators promise to lower your payments by significant amounts, you term of payment may lengthen. When all is said and done, you could end up paying more.

• You Can Do It On Your Own – Debt consolidation companies are middlemen between you and your debt. Instead of paying them on average 10% of your monthly payment, not to mention the enrollment fees, you can direct that cash toward the debt.

What Does It All Mean?

Debt consolidation may seem like the easiest solution to your problems, but at the end, it’s actually just another gimmick that profits off of you. Consolidation does not remedy the problem, it actually makes your debt worse. If you use a debt consolidator, you are paying them to hold your money for a period of time until your credit card companies give up hope of ever seeing their money from you. Then, the consolidator negotiates a deal with your credit card company, who inevitably accepts. In the meantime, your credit rating lowers. Worse yet, creditors may show derogatory information about you on your official credit score, further damaging your good standing.

For those who choose to use home equity loans, understand the risks before making the leap. Any unforeseen event (an unexpected pregnancy, an illness, a layoff) can throw off balance your carefully orchaestrated finances, leaving your house at risk. If you must take out a secured loan, consider using your car as collateral. Although no one wants to end up in the worst case scenario, it’s cheaper to replace a car than a house.

Photo by Andreas Rueda