Why consolidating debt is not always the solution

 

If the only debts you have are mortgages on properties, you can safely skip debt consolidation. However, if you also have credit cards, interest-free offers, personal lines of credit, car loans, you need to keep reading.

Debt consolidation often involves a change of life and is easy to do, which is why many people consolidate debt every day

Debt consolidation often involves a change of life and is easy to do, which is why many people consolidate debt every day

Of course, we also know that everything that glitters is not necessarily gold, so let’s take a look at what consolidation is, why or why you should not do it, and how to do it well if you decide to go ahead.

Quite simply, the consolidation of the debt is the combination of several debts in a smaller number of credits, preferably one. For people with property, this usually means paying a higher interest rate on personal credit, with borrowed money at a lower interest rate on a mortgage loan. Commercials rejoice to tell you that consolidating your debts in this way can:

  • Make your life easier by eliminating several different payments on different dates, replacing them with a single payment

  • Lower your monthly payments

  • Save thousands of pesos in interest by changing an outrageously high interest rate for a much lower mortgage interest rate.

Now I know I’m a bit cynical, but the benefit of the “single payment” is a bit of a false clue. It’s like the seller of upholstered furniture giving you free tissue protectors for your new room. You can take it as part of the deal, but you would not go into a store to get tissue protectors and get an upholstery in the living room with an offer. It is a bonus, of warm and pleasant feelings, designed to awaken your interest and get your predisposition. With online banking and payroll domination, most people do not get any benefit from the old promotional talk of the single payment.

However, the other two benefits are a completely different story. They are real and from the perspective of financial health, they can mean a change of life. The trick is that you can not significantly lower your monthly payments AND save thousands of pesos in interest. Although consolidation could be an important step in regaining control of your money, there are three vital facts that you must understand before jumping into the dark abyss:

  1. Debt consolidation is a sham, the yo-yo effect of finances – many people who do so often end up in a worse situation in a year or two since then.

  2. If you need to consolidate the debt, you are already being hit in the credit game. Your opponents are the banks and their expert friends who “help” you to get into debt so that they can silently withdraw money from your pocket. However, you are not losing the “credit game” as much as you are losing your own money, and the time it takes you to earn that money.

  3. Choosing debt consolidation to lower your payments means that you are still being hit by banks and agents, only that they are different banks and different agents.

Remember, many people who consolidate their loans will fall back into old habits

Remember, many people who consolidate their loans will fall back into old habits

Every time you consolidate debt in your mortgage you are giving up your property’s net worth. It’s like changing part of your house for a new sofa, the latest TV, a pair of shoes or a night out of town. So before you take your credit card, ask yourself “Is this really what I want to do?”