Bill consolidation, also called debt consolidation, not only doesn't work, it's dangerous, according to financial guru Dave Ramsey. Ramsey even goes so far as to call this practice a con, because when people go the bill consolidation route, they are fooling themselves into thinking this is going to solve their debt problems. In reality, bill consolidation is simply moving your debt to a new place. You have not addressed the reason why you need to consider bill consolidation in the first place.
Bill Consolidation Defined
Bill consolidation is taking out a loan large enough to pay off all of your existing bills. The reason people do this is to help them manage their bills and to try to lower the interest rate they pay on their bills. The problem is that people usually end up paying more over the course of time with bill consolidation loans.
Types
Types of bill consolidation plans are taking out a home equity loan, taking out a personal or debt consolidation loan or making a balance transfer. Home equity loans are available to people who own a home with more than 20 percent equity in it and who have good credit. This type of loan is tax deductible, which makes it the best choice if you qualify. The problem is if you default on the home equity loan you could lose your house. If you don't own a home, you may qualify for a debt consolidation loan that has a lower interest rate than what you are paying on your current bills. If you have several credit cards that are not maxed out already, you can transfer the balance of your higher interest rate cards to your lower interest rate card. If you transfer to a lower rate card that has a low promotional rate, however, make sure you pay off the balance before that teaser rate expires, or else you are likely to be paying more in interest than you were before.
Considerations
The reason Ramsey advises against taking out any type of bill consolidation loan is that simply taking the bill consolidation route will not make you debt free. Ramsey sites a statistic from a friend of his in the debt consolidation business who says that 78 percent of the time, after someone consolidates debt, the debt grows back again, because there is no plan for it not to. To prevent the same debt from piling up again, people need to stop using their credit cards, instead paying for everything in cash or going without. People also need to save for life's unexpected events, according to Dave Ramsey's website.
Significance
Some people don't realize that they are paying less per month for the same debt not because of the lower interest rate, but because the term of the loan has been extended. Therefore, even though your interest rate may be lower, if your term is extended you will be paying the lender more, because the longer you stay in debt, the more money you pay in interest. Making money off people who take out a debt consolidation loan is what keeps the debt consolidation business going.
Expert Insight
If you are in debt to the point of considering bill consolidation, a better idea is to undergo what Ramsey calls a "total money makeover." You need to change your habits, make a budget and stick with it. If you can take on a second job to pay off your debt, that is preferable to taking out a bill consolidation loan.
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