debt-consolidation-toronto-ontarioWhat is debt consolidation? Debt consolidation consists of taking some number of debts, each with their own minimum payment, like credit cards, and paying them off with a home equity loan, for example, making it a secured loan. The payment on the home equity loan has a lower interest rate and payment than the combined credit cards. Abracadabra! The debtor can breathe again.

Many caution against turning unsecured debt into secured debt. Nolo says, “here is a huge downside to consolidating unsecured loans into one secured loan: When you pledge assets as collateral, you are putting the pledged property at risk. If you can’t pay the loan back, you could lose your house, car, life insurance, retirement fund, or whatever else you might have used to secure the loan. Certain assets, such as life insurance or retirement funds may not be available to you if the loan is not paid back before you need to use them.”

It might sound nuts, but Dave Ramsey, cautioning on debt, and Wells Fargo, in the business of loaning money, agree. “Before you apply, we encourage you to carefully consider whether consolidating your existing debt is the right choice for you. …you'll have a single payment each month for that combined debt but it may not reduce or pay your debt off sooner,” says Wells Fargo. Dave Ramsey writes, “Debt consolidation is nothing more than a "con" because you think you've done something about the debt problem. The debt is still there, as are the habits that caused it.” You can bet your life that the consolidator will be right back in pond scum at the first emergency. Out will come the credit cards!

Rather than debt consolidation, de-leveraging is what happens in a healthy economy. Some argue that is why the economy has been so sluggish: people have been de-leveraging. We learn our lessons. We came to the conclusion that we were out there on the end of the branch, not even room for a little bird, when we decided to cut back. We stopped taking on debt, we cut back on spending, and we paid down debt.

Typically, a recession brings 6 to 7 years of deleveraging. Now The Economist says de-leveraging is over. “Mortgage debt bottomed out in the middle of last year and is now rising again. Student and car loans are rising briskly. Only home-equity and consumer loans continue to shrivel. In absolute terms, household debt is rising again (see chart). Relative to household income, it peaked at 135% in 2007, fell to 109% at the end of 2012, and has roughly stabilized around that level.”

Although consumers are no longer cutting back, the public sector is only just beginning to tighten its belt. Businesses have borrowed money at these low interest rates and bought back stock, propelling their shares higher, but contributing little to R&D and expansion. Experts suspect deleveraging, including firms and government, could go on for another four or five years.

Our advice: deleverage instead of consolidate. You will have to cut back, but you will stop adding to your total debt. Seek professional help about budgeting and ways to pay off too much debt.

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