Myth: Credit myth and Debt Consolidation plans, will save you interest and you will have one smaller payment.
Truth: Debt consolidation is probably the worse case scenario you can pick, as these companies not only collect money from you, however they collect money from the creditors as well. A BIG conflict of interest!
The credit myth and debt consolidation is very much like a con game. You truly believe that you have done something positive about the debt problem. What you do not realize is that the problem is still there, as well as the habits that caused it in the first place. The only thing you have done is move your debt from point A, your home to point B, the debt consolidation company! The truth is you cannot borrow your way out of debt. You cannot get out of “the debt trap” by digging out the bottom.
Larry Burkett, a noted financial author, states that debt is not the problem; it is the symptom. Debt is nothing more than overspending and under saving. Our debt counselors will never recommend a debt consolidation for you as a way to get out of debt. Why? Because debt consolidation does not work! In fact, once people figure this out, usually between 9 months and a year, they drop out of the program at a rate of 85% to 90%, IN THE FIRST YEAR ALONE!
A friend of mine works for a debt consolidation company. Her primary job is to hold “financial education” classes on evenings and Saturdays. She told me that was the “guise” of why she worked there. Her primary job, and the one she made here money on, was to try and keep customers in the debt consolidation program as long as she could. That sure does not sound like a positive plan to me.
Debt consolidation does seem appealing to some because there is a lower interest rate on some of the debt and a lower payment. However, in almost every case we review, we find that the lower payment exists not because the rate is actually lower but because the term of the debt is extended out for longer periods of time. Therefore, if you stay in debt longer, you will get a lower payment, however if you stay in debt longer, you pay the lender more, which is why these companies are in business to begin with.
Let’s say for example you have $35,000 in unsecured debt, including a two-year loan for $20,000 at 12%, and a four-year loan for $15,000 at 10%. Your monthly payment on the $20,000 loan is $941 and $380 on the $15,000 loan, for a total payment of $1,321 per month. The debt consolidation company tells you they have been able to lower your payment to $631 per month and your interest rate to 9% by negotiating with your creditors and rolling the loans together into one. Sounds great, doesn’t it? Who would not want to pay $690 less per month in payments?
However, what they do not tell you that it will now take you six years to pay off this debt. This still may not sound that bad to you at first unless you realize how much more you will actually pay in additional payments. You will now pay $45,432 to pay off the new loan vs. $40,852 for the original loans, even with the lower interest rate of 9%. This means you paid $4,580 more for the “lower payment.” This is why our debt settlement professionals will never recommend this type of program to you.