Does Debt Consolidation Actually Work?

Many individuals have become consumed by debt. With salaries stagnant, rising inflation, high unemployment and an ever-increasing global recession, it seems that people have fewer and fewer options to paying off their debt. Some only exacerbate their debt problem by making the same mistakes over and over again. They continue to live well beyond their means and extend their use of credit by taking on loans they can’t possibly pay and making purchases they can’t possibly afford. However, for those who’ve decided to tackle their debt and want to move forward on paying it down, what’s their best option? Well, the most common and widely recognized option is debt consolidation. Debt consolidation allows individuals with debt to amalgamate or consolidate all their debt into one monthly payment. Debt consolidation is typically geared towards individuals with debt arising from credit card expenditures, student loans and other miscellaneous credit extensions. It is not intended as a way to pay down mortgages or other real estate investments. While there are some benefits to the idea, the question mainly becomes whether it actually works or whether it only exacerbates an individual’s debt problem.The BenefitsFor individuals with multiple credit cards, paying down the minimum monthly payment on outstanding balances does next to nothing to reduce their debt. For those with multiple credit cards, and multiple loans, using debt consolidation allows them to concentrate on making a single monthly payment. Over time, they are able to reduce their debt load and are also able to increase their monthly savings, as they have more disposable income. Other benefits include being able to reduce the interest rates on these balances as the interest rates on debt consolidation loans are often much less than those on credit cards. In fact, in some instances, a debt consolidation loan can reduce interest rates by more than a half.The DrawbacksWhile there are benefits to consolidating debts, there are an equal number of drawbacks. Detractors of these loans point to the fact that it doesn’t get at the root problem of why individuals accumulate debt. In a number of cases, individuals get consolidation loans, only to accrue additional borrowing from new credit cards and loans. While credit is now tighter due to the global recession, it’s only a matter of time before credit becomes more easily accessible. Other issues pertain to how a consolidation loan can affect one’s overall credit rating. In addition, a consolidation plan doesn’t mean an individual is out of debt. They still have the loan to pay and must make changes to their behavior in order to avoid making similar mistakes.For individuals who must address their indebtedness and eliminate it, and who have the discipline to stick to their plan, a consolidation exercise can help reduce debt over time. However, it’s important to note that a consolidated loan is not the end of the individual’s debt and it can adversely affect one’s credit rating. This is especially true for individuals who secure one debt consolidation loan after another.