It’s not a math problem. The numbers on debt consolidation actually sometimes make sense. Credit cards (for instance) offer high interest rates because they’re unsecured, personal lines of credit. The most popular consolidation loans are home equity loans which offer much lower interest rates because they’re secured against your home. If you stop paying a credit card, the debt goes to collections and the credit card company receives pennies on the dollars that you owe them, their risk is high and you pay for it. If you stop paying a home equity loan, the bank has a stake in your house and they can sell it to get their money back (foreclosure), their risk is much lower and you pay less for it. So that all makes sense, isn’t it an obviously beneficial move to slide the debt from unsecured credit cards with high interest rates into a secured home equity line with a low interest rate?
Like I said, the math may sometimes make sense on paper (may, although there are some serious issues with home equity loans which offset the juicy interest rates), but the math was never the issue. We need to consider the root of the problem. If the root of the problem is that you’ve got high interest rates on credit card debt then a consolidation loan solves the problem; done, easy. Unfortunately, that’s not the root problem. The root of the problem is that you’ve got a broken relationship with money and things. You buy things because you want them and you worry about where the money will come from later. You use credit cards because, points (obviously), and they make you feel like lots of little purchases are no big deal. Your financial life lacks intention, there’s a disconnect between your purpose/values, and your money/spending. A consolidation loan is appealing for the momentary relief it could provide, your monthly debt payments might be cut in half, but it’s only a bandaid. Without a more fundamental change to your relationship with money and your spending habits, the consolidation loan will actually only end up causing more debt and more pain in the future.
Home equity loans (again, the most common type of consolidation loan) are usually interest-only loans, which means if you make the minimum (interest-only) payment each month, the debt could continue on into eternity. The lower interest rate is not helpful if the debt isn’t going down. People often end up paying far more interest on a low-rate equity loan than they would have by aggressively paying off a credit card.
A debt consolidation loan will wipe out your credit card balances leaving lots more room to spend. Without a change in the deeper issue (your relationship to money), you’ll just end up with the old credit card debt in the consolidation loan and new credit card debt on the credit cards. It’s a wicked spiral.
So don’t play the debt games. Credit cards aren’t necessarily the enemy, but using them without having the cash to back your purchases, that’s a problem, a problem that the best consolidation program in the world can’t solve.