Truth about Debt Consolidation
You’re in deep with student loan debt, car loans and credit cards. Not even minimum monthly payments is doing the trick to help nix your current debt. Well, something has to change, and you should certainly be considering debt consolidation simply because of the allure of one easy payment and the promise of lower interest rates.
The actual truth is that debt settlement companies and debt consolidation loans don’t really help you slay huge amounts of debt. As a matter of fact, you end up staying in debt longer and even pay more because of so-called consolidation. Get the facts before you consolidate or work with a settlement company.
Below are some of the important things you need to know before you consolidate your debt:
- When you consolidate, a lower interest rate is not always a guarantee.
- Debt consolidation is not debt elimination.
- Debt settlement is very different from debt consolidation. Both can easily scam you out of thousands of dollars.
- Debt consolidation is actually a refinanced loan with extended repayment terms.
What Is Debt Consolidation?
Debt consolidation is just a combination of several unsecured debts which basically include; credit cards, payday loans, and medical bills into one monthly bill with the illusion of a relatively lower interest rate, simplified debt relief plan and lower monthly payment.
How Does Debt Consolidation Really Work?
Let’s say you have $30,000 in unsecured debt. And they include a four-year loan for $20,000 at 10% and a two-year loan for $10,000 at 12%. This will mean that your monthly payment on the first loan is $583, and the payment on the second is $517. That is actually a total payment of $1,100 every month.
You decide to consult a company that promises to significantly lower your payment to let’s say $640 per month and your interest rate to about 9% after negotiating with your creditors and rolling the two loans together into one. To be honest, that may sounds great. Who wouldn’t really want to pay $460 less every month in payments?
But here is the downside: It will now take you six years to pay off the loan. Six. Years.
If that is not bad enough, then imagine you will end up shelling out about $46,080 just to pay off the new loan versus $40,392 for the original loans—even with the lower interest rate of 9%. This then means, your “lower payment” has cost about $5,688 more.
What’s the Difference between Debt Consolidation and Debt Settlement?
There’s a huge difference between debt settlement and debt consolidation, even though the terms are often used interchangeably.
We have already talked about consolidation: It is a unique kind of loan that basically puts together several unsecured debts to make a single bill. Debt settlement is a bit different. It simply means you consult a company and allow it to negotiate a lump-sum payment with your creditors.
Debt settlement companies also charge a fee for their “service.” Most of the time, settlement fees may range from $1,500 to $3,500. In most instances, fraudulent debt settlement companies tell customers to stop making payments on their debts and instead pay the company. Once they account for their fee, they promise to settle your debts after negotiating with your creditors. Well, this sounds great, right? Not so fast. The debt settlement companies normally don’t deliver on assisting you with your debt after they take your money. They will leave you on the hook for additional interest payments and late fees on debt they promised to help you clear!
It’s important to know that debt settlement is a scam, and any debt relief company that asks you to pay any fee before they actually reduce or settle your debt is in total violation of the Federal Trade Commission.(2). Always avoid debt settlement companies at all costs.
The Fastest Way to Get Out of Debt
When you choose to consolidate your debts or maybe work with a debt settlement company, you will only be treating the symptoms of your money problems and never tackle the main reason why you have issues in the first place. I always say, you really don’t have to consolidate your bills – all you need is to completely delete them. To make that possible, you have to change your mind set about debts! MoneyLend says, “Personal finance is only 80% behavior and 20% head knowledge.” Although your choices may land you in a pile of debt, you still possess the power to work your way out! All you need is the right plan.
The solution isn’t a quick fix, and it won’t come in the form of another loan, debt settlement or a better interest rate. The solution requires you to roll up your sleeves, make a plan for your money, and take action! Becoming debt-free is actually the reward for your hard work.