The theoretical advantage of debt consolidation is that the interest rate and fees paid for the resulting debt are lower and the payments more manageable than that of the previous unsecured debt. However, this is so only in theory. What happens in the practice? It really depends on the willingness of the debtor to commit to certain conducts in terms of expenses and money management because sometimes the solution is worse than the problem.

The issue with debt consolidation is that though the payments may be lowered, the extent of reduction varies according to the nature of the debt and also, the overall debt gets reduced just a little in the best scenario and most commonly increases because in order to reduce the monthly payments, the length of the consolidated debt is extended and thus accumulates more interests in the long run.

Why Theoretical Advantage?

Because the debt consolidation theory states that by replacing multiple debts of high interest rates with a single debt whether it is in the form of a loan or a line of credit provided by the debt consolidation agency, the debtor can obtain important debt reductions both in terms of monthly payments and on the overall debt too. However, these benefits can only be obtained under certain circumstances.

If the borrower can provide some sort of collateral (property or vehicle for instance), then a debt consolidation loan can be obtained and the terms can be very advantageous. However, most of the time people cannot afford high monthly payments even when debt is consolidated and thus need to extend the repayment program of the new debt too. Therefore even if the new monthly payments are lower, the overall debt increases significantly and if the new debt is secured, there is a new risk added: foreclosure. Moreover there is another issue to be taken into account:

Money Management Problems Not Solved By Consolidation

What debt consolidation does not address is the problem that drove the borrower to so much accumulated debt. With very few exceptions, the reason why debt (especially credit card debt) accumulates is overspending (living above your income capacity). This problem is not solved by consolidating your debt whether it is through a debt consolidation agency or with a debt consolidation loan.

If the debtor consolidates his debt but keeps spending over his income capacity, chances are that within a small period of time debt will pile up again and the risks of default and bankruptcy will be present again. But this time, if debt was consolidated with a secured loan (the most common scenario), the debtor can lose his property to the debt consolidation agency or lender.

Smart Borrowing And Money Management Techniques

Summing up, the theoretical advantage of debt consolidation is true but only if the debtor commits to improving the way he manages his finances. Debt consolidation is not enough if the reason why you are in debt is spending more than what your income lets you. Only smart borrowing and money management techniques like budgeting skills and correct credit card usage will prove effective in solving your debt problems and making you debt free again once and for all.