The Dangers and Drawbacks of Debt Consolidation

Too much debt to handle? If your monthly debt payments are making it hard to make ends meet, you may be considering consolidating your debts.

There are quite a few benefits to debt consolidation (though they change a bit depending on which method you use). Ideally, you should only consolidate your debt if it saves you money, simplifies your budget, and helps you meet your financial goals.

There are drawbacks to consolidating your debts, however, which you should consider before taking the plunge. Again, different consolidation methods have different features, so be sure to familiarize yourself with the pros and cons of the option you’ve chosen. These are the more general dangers of using any form of debt consolidation.

Drawbacks of Debt Consolidation

One Big Payment

In any form of consolidation, many debts come together in one, single payment. Theoretically, this new payment should (hopefully) be less than the combined payments, making repayment easier.

But what if funds are tight? Consolidation may cost you a little flexibility in how you deal with a shortfall. That may be a minor concern in the grand scheme, but it’s important to make sure your new payment fits comfortably in your budget.

Consolidation Won’t Fix Bad Financial Habits

Debt consolidation can make your day-to-day budgeting easier by freeing up some cash and accelerating your debt repayment. But that’s really only if your debt is static.

If your debt problems stem from unhealthy spending habits, then consolidating your debts is really only a bandage and won’t help you in the long run. In fact, it might make things worse if you feel like you can “afford” to keep spending money now that you’re consolidated your debt.

Don’t forget to address the reasons for your debt first, before committing to any form of debt repayment plan. Otherwise, you may find yourself in a painful cycle of rising debt.

You May Be Limiting Your Future Options

Taking an unsecured credit card debt and rolling it into your mortgage is a potentially advantageous way to save money by consolidating debt. The trouble, however, is that credit card debt and mortgage debt are very different, as are the consequences of defaulting on each.

When you consolidate your debts, you run the risk of losing out on certain options and programs. Consolidating Federal student loans into private loans could potentially cause you to miss out on applicable repayment programs. Turning unsecured debt into secured debt could make it difficult to file for bankruptcy, should you attempt to liquidate your debts.

You Need to be Committed

Debt consolidation isn’t a quick fix. Whichever method you choose, you need to be committed to seeing things through to the end and paying your debts off. If you’re using debt consolidation as a temporary measure to make things easier, it might work for a while, but eventually you may find yourself in a worse place than where you started. Only consolidate your debts if you’re committed to a long-term plan to become debt-free.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.