Consolidating debt is a *bad* idea?

I was just reading this little article in today’s (27 June 2006) issue of the Toronto Metro freebie newspaper. The article describes author Pat Foran’s new book about getting out of debt, “The Smart Canadian’s Guide To Building Wealth”:

Consolidating your debts is bad? Why?

The idea is to lump everything together and pay it over a longer term with lower monthly (or watever) payments but more total interest, right? If you are scraping the edge of affordability, this may be a necessary step. Maybe I’m just disagreeing with his level of emphasis on the subject, but I think that, in terms of financial unwiseness, consolidating debts is nowhere near the top of the list.

In many cases, the people who consolidate debt leave the original lines of credit open, then use them again, making themselves doubly deeply in debt.

Ah, but that’s another issue… (been there, done that, don’t want the T-shirt).

There are lots of different strategies, but I think that it pretty much depends on an individual’s own unique, personal situation.

What is a fiscally optimal solution may not be doable for some, for whatever reason.

According to married friends of mine with student loan debt, it is a bad idea to combine her debts with his debts when consolidating student loans. This is because in the case of one of the three D’s (Death, Divorce, Deferrment) it is not possible to uncombine debts. As I understand it, student loan debt dissapears after death of the student, after divorce one might assume that each person would reshoulder his or her own debt, and in case of deferment, well, now I’m not sure what deferment means, and I think I’ve misspelled it, so I won’t speculate.

This may or may not be related to what the other of the book you are talking about is refering to.

I’ve always heard that consolidating is good, too, but I’ve discovered that there are different kinds of consolidation. The kind we want to get, the kind that’s good for us and worse for the banks, they won’t let us have. We want an unsecured, low interest consolidation loan - the banks aren’t interested unless we’re willing to put our house up as collateral, once again proving my rule of thumb - if the banks like it, it ain’t good for us, and vice versa.

Consolidating debt in many cases means taking out a second mortgage on your house, but they will never call it that. It can have the effect of turning debts that have little effect if you default into debts that mean you lose your house if you default.

Its called ‘layering your debt’ and its bad. Why? Because their behavior hasn’t changed (what got them into debt) so they’re just going back to where they started. I’m sorry, but I have to disagree with Sunspace: It really is the same issue. But I liked Featherlou’s answer: its very true.

Some of the methods deal more with changing the phycology of the person who gets himself into dept, showing him methods on how to live w/o dept - and to show real progress. Yes in strict sense it is not the most cost effective way to deal w/ dept, but may be what is needed to actually get oneself out.

It is rarely 1 size fits all on financial matters

IF you can get a loan that will pay off all your other debts, at a lower interest rate with lower monthly payments, in general consolidation might be worth it to you.

Remember even then though - consolidators are trying to make money off you: if you have bad credit history or have to put up your house or car or Grandmom’s jewels it may not be wise. Often what the consolidators are getting you to do is swap out your unsecured debt (read Credit card and eventually bankruptcy dischargeable in the U.S.) with secured debt - meaning if you can’t cut the repayments you lose you could lose your home, car or Grandmom’s jewels.

If they are offering unsecured loans to you with a bad credit history something is, more often than not, fishy – maybe the repayments are so long that you will never get out.

Consolidation works for some folks sometimes. People, desperate to escape the crushing burden of debt and looking for a life line need to hear: It is not for everyone in all cases. If I were giving advice I would say that rather than “avoid it if you possibly can”

I think I have figured out the problem with my first post in this thread. “Deferment” in all its various incarnations should be spelled “default”. If our imaginary couple become unable to pay all their debts, if “his” and “hers” are separate, they can choose to only default on one set of debts, not all of them.

I don’t think it’s another issue at all. Unless the debtor works hard at changing their ways, it’s a very good reason not to consolidate.

Another thing to consider is that, at least here in the States, debt consolidation is often offered through a credit counseling service – and, until recently, using such a service would usually negatively impact your credit score*. It’s entirely possible that the “credit counseling = bad for your score” thinking still exists, in which case it makes total sense to recommend gradual-but-continuous paying down over consolidation.

(*I have no cite except for my memory: A few weeks ago my company sponsored a “Financial Fitness” week at the office, and one of the seminars was on understanding your credit. The two women giving the presentation mentioned debt consolidation services, and the fact that they aren’t seen as the credit destroyers they once were; the change is pretty recent, though.)

“…Consolidating your debt means you’re too stupid to handle your finances on your own.”

These were the words my Dad told me when I asked him the same question as the OP. Several years down the road I tend to agree with his pithy statement. (yet insensitive)

No, that’s not entirely accurate. If he meant going into debt counselling and doing an orderly repayment of debt plan, then I would be more inclined to agree. Getting a non-secured, low interest line of credit and amalgamating all of your high-interest credit card debts into it and making one payment a month and saving hundreds on interest is not stupid.

Who is offering non-secured, low interest lines of credit?

Its also not stupid in changed circumstances. I work with debtors all day long.

If you’re in a situation where, say, you’ve lost overtime or had to change jobs, death, divorce, etc. and need to lower your payments quickly, consolidation can be fine IF you have the discipline to cut up your cards right then and there. It is certainly better than making minimum repayments on 16% interest cards for the rest of your life.

Also, if its a scenario where its either draw on the equity in your home to back a consolidation loan or file bankruptcy and lose your house anyway, go the loan.

There are limited circumstances in which I advise debtors do this. But it must fit the person, as has been said previously, or its no good. Maybe one or two clients in a month or so.

Otherwise, I have other ways to fix those that are fixable short of bankruptcy that use Australian law.


As well as the problems with switching unsecured debt for secured debt thus putting your property at risk , the fact that the lines of credit are still open so it is very easy to run up more debt (some figures suggest most debtors who consolidate get back into debt - this article states 84%), a consolidation loan can remove flexibility in dealing with debt.

Some consolidation loans are front-loaded. They work out the total interest you would be charged over the lifespan of the loan, and this is the amount you have to pay back. This means that if your circumstances improve and you can pay the loan off early, you still have to pay the full amount, so you can end up paying a lot more in interest than you would have otherwise.

My husband and I both have these, so I guess the answer is Canadian banks. :slight_smile:

Just out of curisoity, how “unsecured” and how “low”?

You didn’t use any home equity, or a car as security?

And by low. . .lower than 10% or just lower than your credit card, which could be as high as 20%?