Are you drowning in debt? Looking for someone to throw you a life jacket? Well if someone tosses you the one marked Debt Consolidation, toss it right back. It sounds like a great idea at first. Put all your unsecured debts together – payday loans, credit cards, medical bills - and pay the interest on that one sum monthly instead of on multiple loans.
The fact is, you end up paying more and staying in debt longer when you consolidate. Here is the real deal on what happens when you combine your debts:
* This is just a refinanced loan with extended repayment terms
* The extension means you will be in debt longer
* A lower interest rate is not always a guarantee when you consolidate
* It doesn’t mean debt elimination
* Debt consolidation is different from debt settlement
Debt consolidation promises one thing, but delivers another – especially when it comes to the promise of a lower interest rate. That rate is usually set at the discretion of the lender or creditor and depends on your past payment behaviour and credit score. Another thing to watch out for are introductory promotions on low interest rates that lure you in, but go up over time.
So why are your payments lower once you consolidate? Because extended terms mean extended payments. Your loan has just been prolonged, you will end up paying more than you owed in the long run. Here’s an example of what I mean:
$30, 000 unsecured debt [$10, 000 2yr loan @ 12% and a $20, 000 4yr loan @ 10%]
Loan #1 Monthly payment is $517 + Loan #2 Monthly payment is $583 = $1,100 per month
A consolidation company promises to lower your payment to $645 at an interest rate of 9%.
Sounds like a great deal – you end up paying $460 less per month – but for how long? Try six years. Six. Years. On top of that, you’ll end up shelling out $46,080 to pay off the new loan, compared to $40,392 for the original loans – even with the lower interest rate of 9%.
That lower payment cost you $5,688 more. Money you could have spent, saved or invested.
Let me throw you a debt life jacket now with some advice that will save you money: change the way you look at debt. You have the power to work your way out, you just need the right plan:
* STOP using credit – if you can’t use cash, don’t buy it!
* STOP saving – savings makes no sense if you have debt interest rates of 11% and higher That money can be used towards decreasing debt
* STOP bad habits – uproot and destroy poor habits negatively affecting your financial freedom
* STOP procrastinating – get up and take a step towards making your financial situation better
Personal finance is 80% behaviour and 20% knowledge. Even though your initial choices landed you in a pile of debt, there is always a life jacket out there to help you out – you just need to choose the right one.
Ian Webster's nearly two decades of recognized experience at several well-known financial organizations has given him the inside track on the upsell of products such as mortgages and mutual funds and allowed him to help clients with everything from lowering their taxes to developing profitable investment portfolios.
His expertise has been featured in The Globe and Mail, Toronto Star, Toronto Sun, and Time. He has also been a featured financial speaker at many high-profile networking functions.
Find Ian online at www.financialfighter.com and on Twitter, Facebook, Linkedin, and Instagram.