This week’s topic is Debt Consolidation. But before we begin, I’ll first make it clear that this blog will not be for or against Debt Consolidation. I’ll be sharing two very opposite views and I’ll be sticking to facts not opinion.
Learn How Consolidating Debt Can Help You
With a debt consolidation loan, a the lender gives you a personal loan that’s used to pay your other debts. This bills may include medical bills or credit card balances. The agreement is, you’ll make monthly payments you the lender over a set about of time, typically 2 to 5 years.
If you’re having a hard time keeping up with multiple payments, it’s a strategy worth considering.
Simplify Your Debt
A debt consolidation loan can simplify your monthly payments into just one payment and may possibly result in a lower monthly payment.
Debt consolidation often works best for those with credit card debt with high interest rates. The goal is to pay one lump sum payment with a lower interest rate than your original loans.
Secure Consolidation & Unsecure Consolidation
If you own a home or other valued property such as a vehicle that you can use as collateral, this is called a secure consolidation loan. Lenders will be more likely to offer you lower payments and interest rates. But remember: if you use your property as collateral, you risk losing it if you fail to repay the loan.
If you do not have collateral to put up this is called an unsecured consolidation loan. Interest rates are much higher on unsecured consolidation loans and require a better credit score to qualify.
Debt Consolidation Doesn’t Work
Myth: Debt consolidation saves interest, and you have one smaller payment.
Truth: Debt consolidation is dangerous because you treat only the symptom.
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 just moved it! You can’t borrow your way out of debt. You can’t get out of a hole by digging out the bottom. True debt help is not quick or easy.
Debt Consolidation Statistics
A friend of mine works for a debt consolidation firm whose internal statistics estimate that 78% of the time, after someone consolidates his credit card debt, the debt grows back. Why? He still doesn’t have a game plan to either pay cash or not buy at all. He also hasn’t saved for “unexpected events” which will also become debt.
Debt consolidation seems appealing because there is a lower interest rate on some of the debt and a lower payment. But this is only true because the term is extended. If you stay in debt longer, you get a lower payment, but if you stay in debt longer, you pay the lender more. But they don’t tell you that because they make money off of you.
A Different Approach To Get Out of Debt
The way you get out of debt is by changing your habits, not your interest rates. You need to commit to getting on a written game plan and sticking to it. Get an extra job and start paying off the debt. Live on less than you make. It is not rocket science, but it is education. It’s financial education and emotional education. You won’t be using the same thought processes and habits that got you into debt to get you out of debt.
Stay credit wise my friends!