Is debt consolidation wise?

According to ConsumerCredit.com, people thinking about consolidating debts often have one question: Is debt consolidation wise or not?

The answer is maybe. As one might expect, the wisdom of debt consolidation depends on several factors:

– The interest rate on the new loan.

– The consumer’s goal in taking out the new loan.

– The consumer’s resolve not to take on any more debt.

With a debt consolidation, you move your debt to a new loan serviced by one lender instead of many.

In theory, with a new loan at a lower interest rate, the money saved on interest each month may enable you to pay off your debts faster. Or, if the new loan has a longer term, you may be able to lower your monthly payment. Either way, debt consolidation might be useful in some situations.

But debt consolidation isn’t always effective.

Debt consolidation is useful for people who are disciplined enough to make the payments without taking on new debt. That’s the key. If you consolidate, but don’t change spending habits, you’ll be in deeper debt in a few years.

With debt consolidation, good credit can make a big difference.

Trying to consolidate debt with bad credit is usually not wise. With a bad credit rating, it is unlikely that you can get a loan with low enough interest to make a difference in paying down debt. While having only one monthly payment may be a temporary source of comfort, consolidating debt to a high-interest loan hurts finances rather than improving them.