Some Hard Facts About Debt Consolidation

Many people think debt consolidation will save them interest because they pay just one loan payment per month. In reality, debt consolidation treats the symptoms, but not the illness. Unless you change your spending habits, your debt will reappear.

When you consolidate your debt, you feel better thinking you’ve taken the steps to solve your problem. Not only is your debt still there, but the habits and actions that caused you to be in debt are also still there. Borrowing money to pay off your debt can’t solve your problem, and reducing debt isn’t as easy or quick as getting one loan to pay off your debt. Not saving enough and spending too much are the reasons you have debt, so unless you change your financial habits and goals, you will remain in debt.  You really need to get my credit score.

How Debt Consolidation Works

Debt consolidation combines unsecured debt and reduces your monthly payment. To illustrate how a typical consolidation loan works, let’s pretend you have $30,000 in debt in two loans. The first loan is a 12% two-year loan for $10,000 with a monthly payment of $517. The second loan is a 10% four-year loan for $20,000 with a monthly payment of $583. Your total monthly payment is $1,100, and you will pay off your debt in four years at the most.

In a debt consolidation, you can lower your interest to 9% for both loans, and your monthly payment is reduced to $640 per month. This saves you $460 per month in payments, but it will now take you up to six years to pay off your loan. With your original payment plan, you would pay a total of $40,392 if you made the minimum payment each month. After consolidating your loans, even with a lower interest rate, you will now pay $46,080 over the life of the loan. Even though the interest rate is lower, you will pay $5,688 more in interest with the consolidation.

Why Debt Consolidation Doesn’t Reduce Debt

Some sources say that after someone consolidates their credit card loan, up to 78% of people will create more debt on that credit card. How can someone reduce their debt only to let it grow again? Because they do not have a cash reserve for emergencies nor have they learned how to budget and pay cash for daily expenses.

The lower interest rate on a consolidated loan tricks people into thinking they will pay less interest over the life of the loan. The longer term of the loan, however, means the borrower pays more more interest over the life of the loan. Even though the interest and monthly payment are reduced, the loan amount is not reduced, so your debt does not disappear.  It’s always a good idea to get my credit score.  The only ones in the scenario with an advantage are the companies that give debt consolidation loans.

How To Get Out Of Debt

To get out of debt and stay out of debt, you need to change your spending habits. Start by creating a plan and budget in writing. Then, you must stick to the plan. Get a part-time job to earn more money to pay off your current debt. Reduce your standard of living to spend less money each month.   The concept isn’t difficult, but sticking to the plan can be difficult. Getting a debt consolidation loan is like putting a band-aid on a large wound. Check credit. Addressing the symptom of a problem won’t fix the original problem.  It might not be a bad idea to do an online background check as well.