Debt Consolidation – Some Examples
Myth: With one smaller payment, you can save interest by debt consolidation.
Truth: Debt consolidation is alarming because you treat just the symptoms.
You may think you have done something about the debt issue, but debt consolidation is nothing more than a “con”. True debt service is not immediate or easy. And you cannot get out of it.
Larry Burkett, a noted financial author, says debt is not an issue; it is the symptom of overspending and undersaving. As debt consolidation does not work, our financial coaches will not recommend it to any client.
Debt Consolidation Statistics
A friend of mine who works for a debt consolidation firm says his internal statistics estimates 78% of the time. But after someone consolidates his credit card debt, the debt grows back. Because he still doesn’t have plans to either pay money or not purchase at all. He also hasn’t saved for “unexpected events” which will also become debt. If you stay longer in debt, you get lower payment, but if you stay longer in debt, you pay more to the lender, this is why they are in the business of debt consolidation.
An Example for Debt Consolidation
For instance, let's say you have a two-year loan for $10,000 at 12%, and a four-year loan for $20,000 at 10%, with $30,000 in unsecured debt. Your total payment will be of $1,100 per month and your monthly payment on the $10,000 loan is $517 and on $20,000 loan is $583. The company tells you they will negotiate with your banks and bring down your payment to $640 per month and your interest rate to 9%. It sounds incredible.
But they won’t let you know that it will now take you six years to pay the loan. Initially this may not sound that terrible until you realize how much more you will pay in additional payments. Even with the lower interest rate of 9% you will now pay $46,080 to pay the new loan versus $40,392 for the original loans. Which means you paid $5,688 extra for the “lower payment.” They make money from you. This example shows why they are in this business.
The Actual Way to Get Out of Debt
The answer is a Total Money Makeover, and not interest rate. Way to get out of debt is by changing your manner. You have to get an extra job and start paying the debt, also live on less than you make. It is emotional, which is why most people need help from someone like Dave Ramsey to get through it. Do not attempt debt consolidation!