The truth about debt consolidation
Debt consolidation is nothing more than a lie for the truth is that debt is still there, and so is the habit that caused it, you just move it together. You can’t get out of debt in this way, just like you can’t get out of the cave by digging the bottom. Breaking out of debt is not quick or easy, but it is the first step to achieving sustained financial health.
Dave Ramsey’s trained financial consultant will never recommend debt consolidation to clients. Why? Because debt consolidation doesn’t work. Let’s find out why.
What is debt consolidation?
So what is debt consolidation? This simply means that you are taking a loan to pay off a large loan-or consolidating debt into one sum, people with high consumer debt are usually considered. But in most cases, debt has increased after someone has consolidated it. Why? They still don’t have a debt plan to pay cash and spend less money. They may not be saved for all ‘accidents’ and will eventually become debt. In other words, the good currency habits of giving up the loan and building wealth do not exist, and their behavior has not changed, so it is likely that they will return to debt.
Debt consolidation appears to be attractive because in most cases, the interest rate on some debt is lower and usually includes lower payments. However, in almost every case, payments are lower due to the extension of payments period, not because of less debt. So if you consolidate your debt, you may get lower payments, but pay more to the lender. To make matters worse, in some cases, interest rates are actually higher, meaning you pay more in the long run.
Debt Consolidation Example
Suppose you have $ 30,000 of unsecured debt including a two-year loan of $ 10,000 at 12% and a four-year loan of $ 20,000 at 10%. Your monthly payments for your first loan is $ 517 and your second loan is $ 583. This is a total payment of $ 1,100 per month. Debt consolidation companies say that they can reduce your payment to $ 640 per month and interest rates to 9% by negotiating with your creditors and merging the loans into one.
That sounds great, doesn’t it? Who doesn’t want to pay less $ 460 a month? But they don’t tell you that it now takes six years to repay the loan. This may not sound terrible until you realize how much extra payment is actually being made. Now you will pay $ 46,080 to repay the new loan, compared to the original loan of $ 40,392, even at an interest rate of 9%, which means you paid $ 5,688 for a “lower payment”. After all, this is not a good deal.
How you think about debt is a radical change. You get out of debt by changing your habits. Commit to a written debt plan and stick to it. Make more money and start paying off debts.