Debt Consolidation Is Not An Easy Out

Category: Finance, Credit.

Many people look at debt consolidation as an attractive option to free up cash and to help them get out of heavy debt.

You simply take all of your loans, combine them into a big loan with a lower monthly payment and life is beautiful from there on out. The premise sounds nice. The problem with debt consolidation is that it usually is a series of poor decisions that led to the need to consolidate in the first place. In a few years you are likely to be in worse financial shape than you were before the debt consolidation loan. Until you solve the underlying issues, debt consolidation is likely to be a tar pit that just sucks you in deeper. The other thing to remember about debt consolidation is that it often spreads your payment over a very long period of time. The offer you lower payments because you will be paying for so long.

Sometimes up to 30 years. For a home, a 30 year payoff might be fine- -the home will probably still have some value at the end of the period. The problem is that any time you are paying on something beyond its useful life, it isn t sustainable. However, paying for 30 years on credit card debt or a car just doesn t make sense. There is a reason that automobile loans are only for 4 or 5 years. If you consolidate your debt and agree to pay on your car for the next 30 years, what are you going to do when you need a new car 10 years from now?

People generally don t keep a car for longer than that. Sure you can take out another loan, but you ll be paying on the first car for another 20 years. 10 years later, you ll still owe 10 more years on the first car, 20 years on the second, and you ll probably need another car. You can see how easy it is to use debt consolidation to get further and further into debt. An most people don t drive a car for a full decade. If you income grows by 10% each year, this might be sustainable. In fact the only way it would be sustainable at a 10% increase is if you don t up your standard of living each time you get a raise.

But for most people it isn t. The point is that debt consolidation doesn t fix your problems if your spending is out of control. And don t think that just because someone is offering you a consolidation loan it is a good idea. It will merely delay the inevitable. Most of these lenders will eventually sell the loan to someone else, so they really could care less if you pay it off or not. If you need a loan, go to a bank and tell them what you are looking for.

Also the people putting the loans together get paid for signing you up- -not based on if you can afford the payment over time. A local bank is going to be much more honest about how much money you can realistically pay off than a debt consolidation firm. For example, if it is the only way to stay out of bankruptcy and you have no other option it might make sense, but only if you also change your spending habits and start some serious financial discipline. There may be some places where debt consolidation makes sense. If you don t you ll probably find yourself in the exact same position, but on a greater scale in just a few years. It is caused by poor financial decision after poor financial decision. Most people don t get into a position where they need a debt consolidation loan on accident.

If you want to keep control of your life, you need to make good decisions- -even if that means not having everything you see your friends with. Debt consolidation is not an easy out. You don t know their financial situation and it is very likely that they will some day pay dearly for their lifestyle today. It is a very expensive option and can keep you in bondage to debt for the rest of your life. Otherwise you are just compounding your problems down the road. If you think you need to get a consolidation loan, be very careful to make sure that the situation that made you need a consolidation loan in the first place has been fully resolved.

Read more...

What Makes You Decide To Carry A Credit Card - Finance and Credit Articles:

What makes you decide to carry a credit card? Thus, only the elite class of the society has the power to make" cashless purchases" using this piece of plastic contraption.

The IRS Does Not Receive Or Store Card Numbers - Finance and Credit Articles:

If you have a tax liability to pay, you have the option of paying your taxes with a credit card. Credit card payments are currently originated only by Official Payments Corporation( OPC) , who provides this service to the IRS and most other states.

The Result Is That They End Up With Huge Credit Bills Which They Cannot Afford To Pay - Barbra Tarbox about Finance and Credit:

Credit cards are one of these things in life that can either be extremely useful or they can bring untold hassles and headaches. They can be used very responsibly and are very handy when buying higher priced items where you would feel uncomfortable about handing over large amounts of cash.