What Is Debt Consolidation?

By Mary Lukow

Most Americans have at least some amount of debt, and many are trying to reduce or eliminate their debt. One option for tackling debt is debt consolidation. Some experts promote this tool for getting rid of debt while others encourage debtors to stay away. The reality is that many people just simply do not understand what it means to consolidate debt. Much less are they able to evaluate whether it is the right solution for any particular situation.

Different Than Debt Elimination

While debt consolidation and debt elimination sound like very similar activities, they actually are not the same. The primary goal of consolidating debt is to combine multiple debts into a single debt with a single lower payment. This can actually work against the goal of debt elimination, which is to get rid of debt as quickly as possible.

May Lengthen the Time of Repayment

Consolidating debt usually has the goal of lowering your monthly debt payment, but is it worth it? Often that lower payment is only possible because the term of repayment is extended beyond the original term. This means that you will actually be in debt longer due to the debt consolidation. When this is the case, debt could be paid off more quickly if the debt is left unconsolidated.

May Increase the Cost of Repayment

Along with lengthening the time of repayment, consolidating debt may also increase the cost of repayment. This increase may be a result of the increased time to repay the debt. It may also be the result of a higher interest rate. Sometimes the amount of debt makes it impossible to obtain an interest rate that is equal to or lower than the current ones. Though you might get a lower monthly payment through debt consolidation, you may end up with a higher interest rate, a longer time spent repaying the debt, and a larger total cost of the debt.

The bottom line is that debt consolidation can be a trap that ends up making your debt situation worse than it is now. Use common sense and careful consideration before you leap into an offer to consolidate your debt. Remember that Federated Bank offers sound lending options when you need to borrow money, and we are always here to help you evaluate your options and find a solution that will work for you.