Are Debt Consolidation Loans a Good or Bad Idea?

by Joe Plemon on July 28, 2009

Although I generally don’t recommend debt consolidation loans, I admit that there are times when such a loan can help. For example, if you have lost your job and the wolves are at the door, consolidating your debt can lower your payments and get you some room to breathe while you are getting back on your feet.

However, in my thinking, it is usually not your best decision. The allure of the programs to consolidate debt is that you can lump all your debts together and have a lower monthly payment. This may be true, but in most cases it is still a bad idea for the following reasons:

Looking for an easy way to consolidate loans? Try Lending Club’s program to consolidate debt

Reasons to Not Do a Debt Consolidation Loan

  • You get a false sense of accomplishment that you did something about your debt. You didn’t! You still have the same debt; you simply moved it.
  • You are told that debt consolidation will save you interest. This is not always the case. Why? Because lower rate debts are often consolidated with the higher rate debts. If your monthly payments are lower as a result of the loan, you have probably agreed to stretch the debt out over a longer period of time. BAD IDEA! Your goal is to get out of debt, not prolong it.
  • You have dealt with the symptom, not the problem. The symptom is your debt; the problem is that you are not good at handling money. 78% of people who take out debt consolidation loans build up new debt (usually credit card debt) and end up much worse than when they started. You need to ask the person in the mirror why he is in this mess.

“But Joe,” you may be thinking, “I have checked the numbers and I am really saving on interest. I can get my payments reduced and still not stretched out over a longer period of time.”

my neighborhood
Creative Commons License photo credit: woodleywonderworks

Maybe so. But I ask, “Saving interest compared to what? Minimum payments?” I am still concerned about the false sense of accomplishment and the ensuing tendency to create new debt. The better you can learn to manage your money, the faster you can get rid of this debt. And the faster it goes away the less interest you will pay. Think in terms of time (how fast can I pay this off?) instead of interest rate.

Problems of Debt Consolidation Loans

So how do you go about dealing with the problem instead of the symptom? It is essential that you create a budget. On one sheet of paper write down your total monthly take home pay. On another write down all of your monthly payments and expenses. Look it over for a couple of days because if you are normal you are probably leaving something out. Hopefully, the income total is larger than the outgo total. If so, you know how much extra you can pay on debt every month. If not, you know what you are dealing with and you need to either raise your income or lower your expenses until you have enough positive cash flow to attack your debt.

Now you can use the debt snowball, using all of that positive cash flow on your smallest debt while making minimum payments on all other debts. Once that first one is paid off, roll the payment amount, along with the minimum payment, into your next smallest debt. You will gain momentum as you see these debts disappear and you will actually be accomplishing something: paying off debt! You will have changed the way you manage money, hopefully for the rest of your life. And you will have something most “normal” people in the USA don’t have: MONEY!

Readers: What do you think? How have debt consolidation loans worked for you? Do you know of anyone who has ever used a payday loan?


{ 4 comments… read them below or add one }

Matt Jabs July 28, 2009 at 11:39 am

To kick “normal” debt consolidation loans & BIG BANKS to the curb, I recently consolidated my debt via

I didn’t accomplish anything toward the end of reducing my debt, but I did accomplish the following:

1. I am now paying interest to individuals instead of the huge banks whose practices I have learned to abhor.
2. I have secured a fixed rate that is very much lower than my existing credit card rates & am no longer suseptible to them raising my rates at the drop of a hat for whatever reason they can concoct!

I cannot give a TOTALLY solid recommendation of yet because it’s too soon to tell, but I will be able to let you know in a month or so after I’m fully involved w/the process.


Joe Plemon July 28, 2009 at 12:16 pm


Thanks for giving us the tip on Lending Club. I am looking forward to hearing more of how your process works.


Mouli Cohen July 29, 2009 at 2:33 pm

This is great coverage of an issue that has devastated thousands of households since the housing bubble burst. If only there had been coverage like this in 2005!


Erin Karraker August 30, 2009 at 1:33 pm

Hey Joe,
Here is the website I was telling you about- Its called an IBR, income based repayment. The article is from The Southern, June 26 of this year. It said that anyone with a federal student loan can apply for this program and if you equalify then it caps your monthly payments, based on your income, and forgives the remaining balance after 25 years. It seems a little too good to be true. Let me know what you think. Thank you!!!


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