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The Bitter Truth about Debt Consolidation - My Personal Finance

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The Bitter Truth about Debt Consolidation

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The Bitter Truth about Debt Consolidation

You’re in the deep end with credit cards, car loans, and student loans. You’ve tried minimum monthly payments to help you reduce your debt but it’s not working and you’re running scared! You’re fully aware that something has to change and you’re considering trying debt consolidation since you’re probably lured with one easy payment and reduced interest rates.

There’s no doubt that debt sucks. But the bitter truth is that debt consolidation loans are even worse. Instead of helping you clear your debts; the so-called debt consolidation will leave you paying more and even stay longer in debts! So it’s important to get the facts right before consolidating your debts or start working with a debt settlement company.

That being said, here are a few important things to know before you consolidate your debt:

1. Debt consolidation is a refinanced loan with a longer repayment period.
2. The extended repayment terms tie you in debt for a longer period.
3. There’s no guaranteed lower interest rate when you consolidate.
4. Your debt won’t be eliminated even if you consolidate.
5. Debt consolidation isn’t a debt settlement. You’ll still have to pay your debt.

So What Is Debt Consolidation?

Debt consolidation involves combining several unsecured debts such as payday loans, medical bills, and credit cards into a single monthly loan with the misconception that the interest rate, the monthly payment will be lower and with the debt simplified.

In essence, debt consolidation promises you one thing but delivers something different. That’s essentially why companies that promote debt consolidation consistently rank among top consumer complaints by the Federal Trade Commission.

Reasons Why You Shouldn’t Consolidate Your Debts
Here are some reasons why you should run for the hills when debt collectors propose debt consolidation.

There’s No Guarantee Of a Lower Interest Rate

It’s important to note that the creditor has the discretion of setting your debt consolidation loan interest rate based on your credit score and previous payment performance. In other words, you’re not guaranteed that the interest rate will stay low even if you qualify for a lower one.

Lower Interest Rates Can Always Change

While the interest may seem low at the beginning, this is to entice you to fall into the trap as they’ll eventually go up and leave you with more debt!
Do not get trapped with “special” low-interest deals, especially after holidays. Many companies know that holiday shoppers rarely stick to a budget and will overspend only to panic when the bills start trickling in and you may be duped into choosing debt consolidation.

You’ll Stay In Debt Longer

Needless to say, you’ll have lower payments because the term of your loan is extended or prolonged. This means that you’ll stay in debt longer when you should be getting out of debt as soon as possible.

Debt Consolidation Doesn’t Eliminate Your Debt

Debt consolidation only helps you restructure your loan for an extended period but it doesn’t necessarily eliminate it.

Debt Consolidation Doesn’t Change Your Money Behaviors

Have you ever wondered why your debt continues to grow even after you’ve consolidated your debts? Well, it’s because you don’t have a practical game plan to pay the debt and spend less. In short, you don’t have a plan to stay out of debt and build wealth, and so you’ll likely go straight back into debt.

How Debt Consolidation Works

Say you have unsecured debt (credit cards, car loans, and medical bills) in the sum of $30,000. The first part of the debt is a four-year loan for $20,000 at 10% and a two-year loan for $10,000 at 12%.

If the arrangement is that you pay $583 on the first loan and $517 on the second one monthly, you’ll pay a total of $1,100 per month and you’ll be out of debt in 41 months having paid a total of $34,821.

On the other hand, if you choose to go the debt consolidation route, you may pay $640 per month at an interest rate of 9%. This may sound great since your monthly payment on the initial arrangement will be less by $460, but that’s not the entire story. Well, you’ll take 58 months to clear the debt and pay $37,104 instead of $34,821, which is an absurd rip off.

The Difference Between Debt Consolidation and Debt Settlement

Do not let debt companies dupe you into believing that debt consolidation and debt settlement are the same. Well, there’s a huge difference. While debt consolidation rolls unsecured debts into a single loan, debt settlement requires you to hire a debt settlement company to negotiate a lump-sum payment with the creditors for less than what you owe. All in all, you should avoid both because they’ll still scam you out of thousands of dollars.

The Best and Fastest Way of Getting Out of Debt

Whether you choose to consolidate your debt or use a debt company to settle your debt, you’ll only be treating the symptoms of your money problems and not the real issue.

Do not consolidate or settle your debts; you need to pay them off and come with a working plan to stay out of debt. There’s no quick fix to this problem and it won’t come in the form of debt consolidation, debt settlement or lower interest rates.

All you have to do is roll up your sleeves, take action and come up with a working financial plan. With time, you’ll become debt-free and even build your wealth!