Financial problems require complicated solutions. 

Tens of thousands of Americans are way too deep in debt. We are not a nation of savers; we are a nation of spenders. It’s OK to spend if you have the money to do so; it’s spending when you do not have the money that gets you into trouble. With millions of Americans in financial trouble, mostly due to too much credit card debt, and thriving industry of “help” has sprung up. All you need to do if you have debt problems is to watch television; sooner or later, an ad will pop up, encouraging you to “consolidate your debt.”

Debt consolidation isn’t a new idea; it’s been around for a long time. The concept is simple - most people who have financial troubles owe money to a lot of people from a variety of sources. It may be a car loan, a student loan, and a few different credit card accounts. Each debt has its own terms and interest rates. And each month, the debtor must write a bunch of checks to a number of different creditors. Many of these debts have minimum payments; for a credit card the minimum is about 4% of the total. All of these add up to a tremendous outlay of cash each and every month.

Debt consolidation aids those with financial problems by letting the debtor take out one big loan that is used to pay off all of the smaller loans. There is only one interest rate and one monthly payment. In many, if not most cases, that payment is less than the sum of all of the previous payments. The lowered monthly outlay gives the debtor a bit more “breathing room” each month and allows him or her to have a bit of extra cash. There is no shortage of debt management companies who will, for a fee, set anyone up with a debt consolidation loan. So, is debt consolidation a slam-dunk solution to debt problems?

Not necessarily, and debtors need to consider all of the issues before paying someone a lot of money to “fix” their debt problems. Sure, consolidating your debt is nice, and reducing your monthly payments is nice, too. Often, that convenience comes with a price. Loan companies are so eager to get people to take out consolidation loans that they usually hype the “lower your payments” aspect of the loans. What they don’t point out is that the payments are often lowered by dramatically extending the duration of the payments. If you have a few credit card loans and you combine them using a home equity loan, you could be extending those payments for as long as twenty five years. Your interest rate will be lower, but in the end, you will actually pay more money than if you had not combined loans in the first place!

Before combining loans to pay off your bills, you should discuss your problems with a financial professional. What you want is to get out of financial trouble quickly and by spending as few dollars as possible in the process. That should be your goal.

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