Debt consolidation makes sense when you can consolidate many high interest rate debts, such as credit cards, into one lower interest rate debt consolidation loan. You get a lower interest rate, and only one payment to worry about each month.
However, in some cases it does not make sense to consolidate your debt.
For example, if you already have a low interest rate loan or credit card, there is probably no advantage in consolidating that debt. If you have a loan at 6% interest, because it’s a secured loan, or because you had a co-signer, it does not make sense to consolidate that loan into an 8% interest rate debt consolidation loan. Yes, by consolidating you eliminate a monthly payment, but paying an extra 2% for that privilege is not generally a wise financial move.
Also, if you owe a small amount on a loan consolidating may not be wise. For example, if you have $200 remaining on a department store credit card at a high interest rate it is tempting to repay it with your debt consolidation loan. A better solution may be to simply pay it off and then it’s done. No debt is the best kind of debt.
In most cases debt consolidation is a wise financial strategy, but be careful not to consolidate too much debt.
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