Debt Consolidation – It Can Work

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There are those who believe all lending is evil, I don’t buy it.  As Solomon said in Ecclesiastes, “To every thing there is a season, and a time to every purpose under the heaven:”  – Ecclesiastes 3:1

One of the only reasons you should borrow is to pay off debt, and even then you should only borrow when you meet some specific criteria.  Here are those criteria…

When is Debt Consolidation okay?

I do not believe you should take on new debt, but if you have existing high interest debt then debt consolidation may be a viable option.  I consolidated my high interest debt through Lending Club.  This may or may not be a good idea for you… read on.

Most debt consolidation companies you see advertised are a scam, so BE CAREFUL.  Never use a debt consolidation company that you have never heard of before, and try to use a company that someone you know and/or trust has had personal experience with.

No matter what you read, to come up with the best answer for your specific situation you MUST evaluate your options in relation to your circumstances.

Here are a few simple rules to follow when considering a debt consolidation loan:

  1. Have a game plan to repay the debt. If you do not have a debt reduction plan, do not consolidate debt.  Period.  If you do not have a plan chances are that you will not pay off the debt.  Set realistic financial goals, develop a strategy to reach your goals, and start faithfully executing your plan through completion.  Before consolidating my debt with Lending Club, I already had my debt reduction plan in place.
  2. Do not take on more debt. You have to be resolved to avoid additional debt at all costs, NO MATTER WHAT.  Do not – I repeat – DO NOT take on more debt while you are repaying your existing debt – and I urge you to avoid all debt from here on out.  Rather than taking on more debt, focus on eliminating what you have and saving money for the future.  Before consolidating my debt with Lending Club, I committed to not take on any new debt.
  3. You have not paid off the debt until you actually pay off the debt. Remember… when you consolidate your debt you do not eliminate anything, you simply consolidated to fewer payments and shift the debt to a different lender.  Do not fall victim to the common misconception that you paid anything off until you actually pay something off.  When I consolidated with Lending Club, I felt good about my lower rate and overall long term savings, but I did not fool myself into thinking that I had somehow eliminated the debt itself.
  4. You can consolidate at a lower rate than all existing loans. If you have five high interest loans you are looking to consolidate, but only four have a lower rate than the rate being offered in consolidation, then only consolidate the four.  Never consolidate a loan with a lower rate into a consolidation loan with a higher rate.  When I consolidated my debt using Lending Club I had four loans and all four loans had higher existing interest rates than what was being offered in the consolidation loan itself; because of that, I moved forward and consolidated all four loans at the new lower rate.
  5. Always speed up debt repayment. Repaying debt is about commitment and hard work.  Get a second job, reduce expenses, start a business on the side, stop spending more than you earn.  Use all or any of these strategies to repay the debt ahead of schedule.  Remember… the faster you reduce debt principal, the less you pay in interest, and the sooner you get out of debt!

If these five rules sound doable to you, then a debt consolidation loan may work for your particular situation.

I recommend Lending Club

I have personal experience consolidating my debt with Lending Club.  I am in the process of following through on that debt consolidation plan and have paid off $4,500 of my $11,080 consolidation loan in just four short months.  The repayment term on the loan is three years but I plan to have it paid off before July of 2010.

If you are responsible, have a plan, are committed to no future debt, understand debt consolidation does not mean debt elimination, want to check rates against your current debt rates, think you can speed up debt reduction, and have a decent credit score (660+)… then I suggest you check into consolidating your debt with Lending Club.

See if Lending Club is right for you

Myself along with several other well-respected personal finance bloggers have united to help fight debt and advise toward wise debt consolidation in what we have dubbed the Lending Club DebtBuster Challenge.  This post is part of that challenge.

Other personal finance bloggers participating are:

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1 Phil

I thought about combining my debt a long time ago but decided against it because I didn’t like the idea of one large debt. I would rather pay off the credit cards one at a time and then apply that to another card. This worked for me and now I am debt free. Don’t owe anything except normal every day expenses. It wasn’t easy but it can be done. Just takes a lot of work and will power. However, getting a loan to pay off debt can help you if you choose wisely. If you don’t you will end of paying more and never get out of debt.

2 FinancialBondage

debt consolidation don’t work most of the time. why? because most people keep borrowing and using credit cards and have not changed the habits that got them into debt in the first place. You can’t borrow your way out of debt. A concept the federal government don’t understand.

3 Matt Jabs

Although I do not have any numbers to support or combat your statement… I would tend to agree with you. Do you have any data to support this?

4 ChristianPF

I remember reading a stat that said more than 70% of people who consolidate their debt end up back where they were (or worse). The reality is that it isn’t the debt consolidation that is the problem – it is the spending problem. Like you mentioned above, if you aren’t ready to change your spending habits and have a plan in place, a debt consolidation isn’t going to do any more good than an obese person getting lyposuction, but continuing to eat the same way. The weight is an effect of the eating, just like the debt is the effect of the root cause of the spending (normally).

5 Matt Jabs

Precisely… like any other problem, having debt often reflects an underlying and fundamental issue of the heart. If this heart issue is left unattended, in and of itself a debt consolidation loan will have no lasting effect.

6 Artie

Dave Ramsey talked about it, the number is high. 70% sounds pretty close… normal behavior is that people will pay off the credit cards using a home equity loan or other loan…. then start using the credit cards carelessly again… and in a year or two be right back where they started, but worse off… credit card debt again, and a loan for the former credit card debt that was moved.

7 Christine

I’ve already consolidated my debt with another company. 🙁 I should have found your blog earlier.

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