On its surface, debt consolidation makes a lot of sense. Rather than having several accounts with different, often high interest rates, people can combine them into one payment. This can save money over time because they may have fewer accounts to keep track of, possibly lower interest rates or at least a shorter term. You only pay one source, and they give it to the other creditors.
But there are circumstances where debt consolidation may not be the answer. Or at least people should consider the option carefully before proceeding.
There are also some other potential pitfalls that people may fall into:
Continuing to use credit cards or accounts after the debt on them is consolidated
This simply can put someone back in the same financial dire straits that the person had with multiple balances on multiple accounts. But now you’ll have balances on multiple accounts along with the larger consolidation loan you’re still paying on.
Opportunities for settlements
Under some debt consolidation programs, the company that provides the loan may arrange to discharge your debt to some of your previous debtors, often at a smaller amount than you originally owed. Though this will remove the debt and satisfy the accounts, the settlement could damage your credit report.
Not changing spending habits
The ultimate purpose of debt consolidation is to provide people with a helpful opportunity to clean up their poor financial practices and hopefully stabilize their ledgers, without going through the long-term severe damage of bankruptcy. But if someone continues to spend money badly, they will continue a spiral of financial harm. It also will make it difficult to get a consolidation in the future, and any possible relief may take the form of higher interest rates, higher fees, longer terms or even greater challenge finding someone who will provide the loan at a higher risk.
People considering debt consolidation should make sure they do their research into all sorts of options to meet their financial goals. One useful source of info is IRC Commercial Lending.