When getting out of debt, we often wish that there would be a simple solution. There are plenty of TV, internet, and radio ads running around that make it sound like there is a simpler, easier way. It is often referred to as debt consolidation. It is referred to as consolidation because often, it combines your debt into one big loan with a single payment. Although this sounds easier and like you are getting out of debt faster, it actually makes things worse, more often than not. There are various forms of debt consolidation, with each having their own disadvantages.
Debt settlement commercials are running advertisements all over the place on cable TV. However, they are all over the news in a negative way and the FTC is shutting them down by the hundreds each and every day. The concept is that they take your money and try to settle outstanding debts. The bad news is that they take the first few months of payment as fees, none of it goes to your debt, and more often than not, nothing happens! Worse yet, you can negotiate your bills on your own and not have to pay someone else to “maybe” settle. It is not easy and very time-consuming, but if you are thinking of going to a debt settlement company, pocket the money and use it to settle yourself.
Debt Consolidation is often appealing because most of them have non-profit status and can often offer payments that are lower and at a lower interest rate. There is also a monthly fee associated with going through one of these companies. But the lower payments often keep you in debt longer, which means you will spend more money in interest than if you had simply cut back, gotten intense, and paid them off yourself.
Home Equity Loan
We often do not think of these as debt consolidation loans, but they really are. The banks love to sell these to us because they often offer lower interest rates, one lower payment, and the interest is tax-deductible. But think about it, if you get a 15 year home equity loan and use it to pay off your credit card, which had that nice steak dinner on it, you are financing that dinner over 15 years. Talk about financing a depreciating asset! In addition you are also putting your house at risk in case of a financial emergency. I would much rather have the credit card companies calling me if I can not pay rather than lose my home in foreclosure.
The problem with these debt consolidations is that they do not force you to change your habits. If your habits of going into debt do not change, you continue to do what you were doing and the debt will be back before you know it. Instead, what you need to do is get on a budget and work the debt snowball which will help you get out of debt faster. This will not only save you more money over the long run but also force you to change your bad money habits. Interest rates are not your problem; it is the debt that is the problem. If you need help in getting started we are trained to walk with you in your process. We offer many different services to meet your financial needs and offer a 30 minute free consultation to get you started.
What have been some of your experiences with debt consolidation?