Debt Consolidation: A Small Solution to a Big Problem

In essence, debt consolidation simply means combining several different outstanding debts into one lump sum. It can make people’s lives a lot easier to only have one loan payment per month, rather than several.

People may choose to consolidate various kinds of debts including student loans, credit cards, medical bills, and personal loans. There are also several methods for consolidating your debts including taking out a large personal loan to cover multiple debts, and then slowly pay off that new loan over time.

Methods of Consolidation

Debt consolidation isn’t a one-size-fits-all solution. Here are the different types of debt consolidation that could be right for you.

Debt Consolidation Loans

The standard option would be a debt consolidation loan. This means taking out one large loan to cover multiple smaller debts. While this can be a helpful, it only makes real financial sense if you can find a loan with a better interest rate and more manageable payments. Plus, getting a debt consolidation loan with a longer term than your current debts can mean that you’ll pay more in total interest over time.

Debt Management Plans

A Debt Management Plan (DMP) is a method for tackling debt that’s used by credit counselors. These are non-profit agencies that work to help people better manage their personal finances. You can only start a DMP if it is recommended as a plan of action by your credit counselor, and they won’t recommend you for one if something simpler like better budgeting will help you manage your debt load.  Under a DMP, your credit counselor will work with your creditors to secure more manageable terms on your debt, such as lower interest rates or longer repayment periods. Once all the creditors have signed off on the plan and the DMP is in place, you make one payment to the credit counseling agency and they split that among your creditors. While the DMP is in effect, you are restricted from taking on any new debts. Using a DMP can affect your credit score negatively, but once you complete the plan (which could take up to five years depending on your situation) you’ll be debt free.[1]

Debt Settlement

Debt settlement is another form of consolidation. This option, however, can be much riskier than the previous two. Debt settlement companies attempt to lower your principal with your creditors, so the total you owe is more manageable. Unfortunately, some creditors refuse to work with debt settlement companies because they frequently have suspicious reputations. Additionally, this option can negatively impact your credit score. If you do choose to work with a debt settlement company, don’t pay any fees until the debts are settled, and make sure to get in writing the total you’ll owe, the fees they’re charging, and how long it will take to repay.

All-American Debt

While debt consolidation can be a helpful financial tool, it’s only a remedy to a symptom rather than a solution to the bigger problem—Americans are carrying unmanageable amounts of debt.

According to a 2015 debt study by NerdWallet, the average American household carries $130,922 in debt, of which $15,762 is credit card debt.[2] This is an astounding amount of debt. And that’s the average household. Much of this debt is made up of student loans and mortgages. Both of these are considered to be good debts as they could potentially end up strengthening your finances over time. And depending on where you live, you probably need a car, and thus need an auto loan. These kinds of debts are expected, and even helpful, as you may not have been able to buy your car or attend college without a loan.

It’s not the auto loans, mortgages, or student loans that are concerning. The glaring issue here is credit card debt. Based on the amount of credit card debt that the average American carries, it’s clear that many people don’t have a firm grasp of their finances.

Credit cards typically come with high interest rates, and there’s no added financial benefit of having credit card debt like there is with a mortgage or a student loan. Yet the average American carries a running balance on their card.

The Root of the Problem

A lack of financial literacy is driving the debt problem in America.

Economists surveyed Americans over the age of 50, and asked them three questions about things like interest and inflation. Only a third of the participants answered all three questions correctly. They also ran a more in-depth survey of high school students and the results were not surprising. 40 percent of American students surveyed had scores that put them in the lowest level of financial literacy.[3]

Credit card debt research has also discovered that those who are not as financially literate are much more likely to do things that end up leading to more fees and charges, such as only making minimum payments or going over their credit limit. There’s even a study that suggests that one third of the fees and charges paid by those who are less financially literate are directly due to a lack of knowledge on the subject. Basically, if they knew more about debt and finance, they would have saved money.

It also appears that financial literacy is not as common in low-income areas, and those with less education are more likely to make financial missteps. Many financial institutions are taking advantage of that fact. Payday, pawn shop, and title lenders are a few examples. These types of lenders are notoriously predatory, and rely on borrowers’ lack of financial know-how in order to make more money.

Payday, pawnshop and title lenders rely on borrowers’ lack of financial know-how in order to make more money.

If more of the American population was financially savvy the total personal debt would be significantly less. Those who are financially literate are planning for their future through retirement accounts, investments, and mortgages. They’re also able to manage credit cards better than those with little financial knowledge.

The Financial Industry Regulatory Authority’s Investor Education Foundation released data showing that requiring personal finance courses for high school students results in better average credit scores and lower rates of debt delinquency.[4] However, the number of states that require students to take an economics class has been dropping over the past two years. Only 17 states require students to take a course in personal finance.

Only 17 states require students to take a course in personal finance.

We need more financial education for children in school. Schools often require kids to take home economics so they know some basic life skills, but we’re too frequently leaving out one of the most critical skills necessary to leading a successful life: money management. If children were required to learn basic money skills throughout grade school and high school they’d be less likely to take on unmanageable amounts of debt.

While consolidation is a possible solution to individual debt problems, it’s only needed in the first place due to a general lack of financial awareness. If borrowers educate themselves and better manage their money and debt, they won’t be tempted to take on payday loans, title loans, or massive amounts of credit card debt.

Why OppLoans

OppLoans is the nation’s leading socially-responsible online lender and one of the fastest-growing organizations in the FinTech space today. Embracing a character-driven approach to modern finance, we emphatically believe all borrowers deserve a dignified alternative to payday lending. Currently rated 5/5 stars on Google and LendingTree, OppLoans is redefining online lending through caring service for our customers.


  • [1] Fay, Bill “What is Debt Consolidation?” Retrieved June 22, 2016
  • [2] Issa, Erin “2015 American Household Credit Card Debt Study” Retrieved June 22, 2016
  • [3] Cooper, Marianne “Why Financial Literacy Will Not Save America’s Finances” Retrieved June 22, 2016
  • [4] Schwartz, Shelly “US Schools Get Failing Grade for Financial Literacy Education” Retrieved June 22, 2016