The Real Truth About Debt Consolidation
The truth of the matter is that debt consolidation does not make your debts go away. In fact it doesn’t do a lot to help resolve your debts. It does nothing to improve your spending habits which got you into debt in the first place. The debts are still there and so are the same old bad spending habits.
You can never get out of debt by creating more debt. All you do with most debt consolidation loans is dig a deeper hole. Contrary to popular belief getting out of debt is never quick or easy which is the promise of most debt consolidation companies.
Many people think that their debts are the problem. Wrong! Debts are the symptom of bad spending habits. People with a lot of debt overspend and never save. Most financial coaches will never recommend debt consolidation because it simply does not work.
The Statistics Of Debt Consolidation
Most debt consolidation companies will tell you that approximately 75% of people that have their debts consolidated are back into debt within a year. So why does this happen? Because many people after getting their debts consolidated still have not corrected their spending habits and are still overspending and not saving for the “unexpected events” in life. Nothing has been corrected.
Debt consolidation loans are tempting since they have lower interest rates and lower payments than traditional loans. However research has indicated that the lower payments are not actually lower. The payments appear lower because the term of the loan is extended longer than traditional loans. Obviously if you stay in debt for a longer period of time you pay less, however, what most people don’t realize is that you are also paying the lender more money in the long run.
An Example Of Debt Consolidation
For example, if you are in debt for $30,000 which includes a loan for $10,000 with an interest rate of 12% and a 4-year loan for $20,000 with an interest rate of 10%. The $30,000 loan has a monthly payment of $517 while the $30,000 loan has a monthly payment of $ 583. That’s $1100 a month. You go to a debt consolidation company and they tell you that with them you will only have to pay $640 a month with an interest rate of 9%. How they can do this is by negotiating with your creditors and rolling all of your debts into one. Of course anyone would jump at the chance to pay less every month. What they never tell you is that now it will take about 6 years to pay off the loan. That still doesn’t sound too bad until you take the time to understand how long that actually is and that now this loan will take $46,080 to pay it off instead of $40,392 for the first two loans. In reality you just paid $5,688 more than you would have before. Now you know the truth about debt consolidation that they are in it for the money not to help you out of debt.
The Only True Way To Get Out Of Debt
The answer isn’t in the low interest rates. The answer is a complete makeover of your finances and your spending habits. You need to write down how you are going to spend your money and commit to it. The next step is to get a second job and pay off your debts and live on money much less than what you bring home. It’s not hard to do but it can create a lot of tension and be an emotional rollercoaster. Your best option is to consult a financial advisor that can walk you through the process.