Debt Relief vs. Debt Consolidation

Debt consolidation involves taking out a single loan to pay off many others. This is often done to secure (if possible) a lower interest rate, secure a fixed interest rate (if possible). However, the financial area of debt is clouded with more emotion, misunderstanding, and poor teaching than any other area, with the possible exceptions of life insurance. Before starting (on debt consolidation), we need to have a clear understanding of debt:

* Debt is never the real problem; it is only symptomatic of the real problem.

* Debt can be defined many ways. I define it as "any money owed to anyone for anything."

There are five different kinds of debt: (1) credit card debt, (2) consumer debt, (3) mortgage debt, (4) investmen debt, and (5) business debt.

Debt consolidation is usually advisable mostly in theory when you are paying off credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or vehicle can get a much lower rate through a secured loan using their property as collateral - which is a very dangerous decision. The total interest and the total cash flow is then paid towards the debt, which is lowered allowing the debt to be paid off sooner, incurring less interest - in theory.

However, the primary economic danger of debt is that compounding works against you rather than for you. For example, a 30-year mortgage loan on a home at 10% interest rate requires that you pay back over three times the original amount borrowed!

The second economic danger of debt is that debt becomes a trap - getting in takes no effort, but getting out can be next to impossible. When they decide to get out of debt, first of all they must stop going into debt. Second, they must begin to pay back the accunulated debt and, all the while, continue to pay interest.

The third economic danger to debt is: debt always mortgages the future. The first priority use of future income must be debt repayment.

Debt consolidation can simply be from a few unsecured loans into yet another unsecured loan, and most often it involves a loan against an asset that serves as collateral, most commonly a house. In other words, if you fail to pay your debt consolidated loan, you could lose your house as well. Is debt consolidation really the way out?

We recommend that, rather than a debt consolidation loan, you go directly to your creditor with the schedule in hand of how you are going to repay the debt. Paying off your debt quickly is the first and most important step for scriptural financial freedom.

The Bible does show many ways to overcome any financial crisis. Many of these principles are laid out in our successful course, the Scriptural Financial Freedom series. To learn more, you can download the Small Groups kit from our estore.

Action Item:

Debt consolidation. One of the keys to repaying debt is to precommit any extra income or amounts from reduce expenses ro debt repayment.

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