You have probably heard a great deal about debt consolidation, but do you know what it really is? It means taking out one loan to pay off others. You consolidate all your bills into one monthly payment that is more manageable. People who have a high amount of consumer debt often consider this option. The only problem with this arrangement is that most people bad credit who consolidate their debt only find that the debt seems to grow back. The problem isn’t with the debt but rather with the spending habits of the person. Unless a person learns to spend less and use cash, a debt consolidation loan is futile.
Why Consolidations Can Be Dangerous
Most people, who still have good credit, look for a consolidation loan to save them from the plethora of bills they pay each month. They may have fallen on hard times, had some unexpected events, and got in over their head. More often than not, these loans are bailing people out who have a spending problem. These people don’t have good money habits. They use credit cards to fund purchases they don’t need. If the behavior doesn’t change, then they will go right back out and run up their bills again.
Breaking Down The Figures in Consolidation Loans
Getting a debt consolidation loan is very appealing because it lowers the monthly payment. However, while the payment may be lower, the repayment term is extended. The debt doesn’t really decrease, rather, it will increase. You stay in debt for a longer period of time, and you will pay the lender more. In some cases, the interest rate is higher than what you were originally paying on your debts.
For instance, let’s assume you had $30,000 in total debt. This debt contained a two-year loan that was $10,000 with a 12 percent interest rate, and you had a $20,000 loan with a 10 percent interest rate. The total of the monthly costs for both loans is $1,100. By taking out a debt consolidation loan, your payment will be reduced to $640 a month.
A savings of $460 per month is pretty hard to pass up, especially if you are struggling to make the monthly payments. However, under your old loan terms, both of your loans would have been paid off within four years. Now, under the terms of your new loan, it will take you six years to pay off the debts. A couple years doesn’t sound too bad in exchange for a lower payment, but what about the final numbers. The actual amount paid is really eye-opening. The original loans would have cost you $40,392 in total. With the new terms, you will pay a whopping $46,080. The difference between the two is an astounding $5,688. Sure, they gave you a lower interest rate of 9 percent, but it didn’t do anything for you in the long run.
The Real Way to Get Out of Debt
There is no quick fix to get out of debt. What looked like an easy solution only cost you more in the grand scheme of things. The answer isn’t to lower the interest rate, payment, or to consolidate, the answer is to change your spending habits. To get out of debt you must change how you spend and what you buy. For instance, many people save a ton of money by eating at home rather than eating out at a restaurant. Make a budget and stick to it. Have a game plan on how you can save, and make sure you follow it.
If you are finding it hard to make it financially, then you may want to pick up a second job until you get some bills paid off. Learn to live on less and appreciate what you have. Bigger cars and homes are great if you can afford them. Many people get caught up in materialism, only to find out it is very costly to ‘keep up with the Jones.’ Debt consolidation is not the answer, and it is not a way out of debt. It is a way to free up more money to spend more. If you fix the real issue, then you will not need a loan.