Do you recommend debt consolidation?

Overall, no, and here’s why: 

• When you consolidate your debt, you essentially get one big loan to cover all your smaller loans. But that one loan often comes with added fees, a longer repayment period and a higher interest rate.

• Debt consolidation is dangerous because you only treat the symptom of the problem. The habits—and the debt—are still there. You just moved the debt! Most people take on more debt after consolidating or end up in bankruptcy because they didn't change their behavior.

• Your time is better spent working to increase your income and cut unnecessary expenses vs. setting this up.

• Debt consolidation is risky because it's putting all your eggs (debts) in one basket. Makes 1 giant problem vs. a few smaller problems.

• Unless it’s possible to consolidate those debts at a substantially lower rate, many would argue against pooling debts into a single larger one as this can actually be demotivating and could slow progress in repayment. https://hbr.org/2016/12/research-the-best-strategy-for-paying-off-credit-card-debt

• When you go down that path, it opens the lines of credit available on your credit cards. So, you’re very likely to begin loading up those cards again. Now you’re in a bind because you now have a large primary loan along with new additional credit card debt. 

• Unless your credit score is very high and you aren’t close to maxed on credit cards, you probably won’t qualify for one anyway. 

• Those loans can come with shorter terms, which means they have higher payments. So, a 12-month, 24-month, or 36-month loan might not provide you the payment relief you need. The goal of doing debt consolidation in the first place is to get payment relief.

• There are two kinds of debt consolidation loans: secured and unsecured. If you take out a secured loan to consolidate your debt, you have to put up an asset (like your car or your house) as collateral. Now, because the debt is secured, your car or home is at risk.

• The only exception for me is if you’ve got multiple federal student loans, especially with variable interest rates. In this case, consolidating can help you focus on one fixed payment. To be clear, only federal student loans can be consolidated through the Department of Education. And while it may be free to consolidate your student loans, you can’t get a lower interest rate than you already have. But if one of your loans has a variable interest rate, it might be worth consolidating to trade it for a fixed rate. Ultimately, it comes down to what’s going to motivate you to pay off your loans in a faster way. 

  • Private student loans can be refinanced, but only consider it if it meets the following criteria:

    • It’s 100% free to refinance. Make sure those savings aren't wiped out by any application or origination fees.

    • You can get a lower interest rate. The main point of refinancing is to cut down your interest rate. Don't get tricked by a smaller monthly payment that doesn't actually lower your rate, because you'll end up paying more over time.

    • You can stick with a fixed rate or switch from a changing rate to one that stays the same. This way, you won't get hit with surprise payment hikes later on.

    • You don’t have to sign up for a longer repayment period. Pushing back the date you're debt-free isn't a good move. But if you can pay off your loan faster with a new deal, go for it.

    • You don't need someone else to sign off on your loan. Getting a cosigner involved can mess up your relationship, especially if money problems pop up.

    • You haven’t recently declared bankruptcy. If you haven't gone through bankruptcy lately, you'll have a better shot at refinancing since lenders are cautious about that.