Debt consolidation: What it is and when it really makes sense
💡 Quick Tip
Debt consolidation can be your financial lifesaver or your worst trap. Discover exactly what grouping your loans consists of, when it is mathematically profitable to do so, and what critical mistakes you must avoid.
What is debt consolidation?
Debt consolidation consists of taking out a new, larger loan to pay off all your existing small debts. The goal is to go from having multiple payments to having a single monthly fee with a lower overall interest rate.
When it is mathematically smart
This strategy benefits you only under strict conditions:
- Real interest reduction: If you manage to exchange 22% credit cards for an 8% personal loan.
- Affordable monthly payment: If current fees suffocate you, unifying can lower the payment in exchange for extending the term.
- Habit change: It is useless to unify debts if you keep using the cards you just zeroed out.
The great danger of reunification
The biggest mistake is freeing up the credit card limit and spending again. In less than a year, you pay the new loan PLUS the newly maxed-out cards.
Steps to do it right
- Calculate the exact total debt and average interest.
- Look for offers in various banks.
- Read the fine print carefully.
- Physically cut the old credit cards as soon as you pay them off.
📊 Practical Example
Practical example with real numbers
Imagine you have three debts suffocating your salary:
- Card 1: €1,500 (Fee: €100, Interest: 22%)
- Card 2: €1,000 (Fee: €80, Interest: 20%)
- TV Loan: €500 (Fee: €70, Interest: 12%)
- Total to pay: €250 a month for a €3,000 debt.
You ask for a personal loan of €3,000 for 3 years at 8%. You pay off the three debts. Now, your single monthly fee is about €94.
You freed up €156 each month. The trick to success is not spending those €156 on leisure, but using them to pay off the new loan early.
