Long-term Costs of Debt Consolidation

Debt consolidation does have some short-term benefits. It allows the consumer to simplify their debt repayment schedule by placing all their high-interest debt into a low-interest loan, which makes repaying debts much more convenient.

Additionally, debt consolidation has the immediate benefit of saving the consumer a fair amount of money. The reason for this is simple: credit card debt is usually very high interest, in some cases as much as 30 percent, but loans used for debt consolidation are relatively low interest. Home mortgages, which are often used for debt consolidation, often have interest rates as low as 4 percent or 5 percent.

So, in the short term, debt consolidation can save you money and make your financial life a little bit easier. Unfortunately this process will have some lasting effects on your finances that are not as attractive. Over the long term, the process of uniting your debts under a single loan may do more harm than good.

Take a look at the following long term consequences:

• Debt consolidation doesn't do anything to change bad spending habits. If anything it reinforces reckless spending by making more credit available to the consumer.
• Consolidating debt doesn't actually reduce the amount you owe; it just moves your debt from one place to another. Debt consolidation loans still take years, sometimes decades, to pay off.
• Using secured debt to pay off high-interest credit cards puts your investments at risk. If you default on your consolidated loan you will still owe your credit card companies but you'll have lost your asset.

It should be obvious that, over the long term, debt consolidation is not worth the trouble it costs. Consumers are better off going with a program like debt settlement to reduce their credit card debt.

Author Bio: Drew Johnson is an expert in the various methods of debt reduction and has successfully reduced his own debt. Read additional articles by Drew on Debt Management and more.

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