Are you having a hard time keeping current with all of your credit cards? Have the credit card companies raised your interest rates? With high interest rates, minimum monthly payments just prolong the agony. The odds are stacked against you as the credit card companies want you to continue making minimum payments for years ahead. Something must change, and you are considering debt consolidation because of the allure of one easy payment and the promise of lower interest rates.
No one likes to be in debt but the truth is that debt consolidation companies are not your only option and may end up hurting you more than you think. They do not offer massive debt relief as advertised. In fact, you end up paying more and staying in debt longer because of so-called consolidation.
Before you agree to consolidate your debt, think about the following points:
- Debt consolidation is nothing more than a refinanced loan with extended repayment terms.
- Extended repayment terms mean you will be in debt longer.
- A lower interest rate is not a guarantee when you consolidate.
- Debt consolidation is not debt elimination, debt relief, or debt settlement.
In debt consolidation, your general unsecured debts such as credit cards, payday loans, and medical bills are combined into one monthly bill with the promise of a lower interest rate, lower monthly payment and simplified debt-relief plan. In reality, the debt consolidation company is preying on you to enroll in their plan with their too-good-to-be-true debt-relief programs. Lower interest rates are not guaranteed and can change over time. The interest rate is usually set at the discretion of the creditor and depends on your past payment history and credit score. The interest rate is usually just an introductory promotion that applies for a certain period of time. Consolidating your bills really means putting you in debt longer. You are not getting out of debt faster nor are you eliminating the debt.
Let’s look at a debt consolidation example: You have $30,000 in credit cards and personal loans. The debt includes a two-year loan for $10,000 at 12% and a four-year loan for $20,000 at 10%. Your monthly payment on the first loan is $517, and the payment on the second is $583. You sign up with a consolidation company who promises to lower your payments to $640 per month and lower the interest rates to 9%. Sounds great but you do not realize that it is going to take you another 1 ½ years to pay off the debt and it will cost you an additional $2,300 in interest charges over time. They are able to lower the interest rate by pushing out the term which results in more money out of your pocket over time.
Look at other available options. You may not need to consolidate your bills. There are other legal options available to you, including Chapter 7 and Chapter 13 bankruptcy. You may qualify for a Chapter 7 bankruptcy and discharge all of the debt. Chapter 13 is also a great option because it allows you to propose a repayment arrangement based on your budget. In most cases, you only have to pay cents on the dollar and interest stops. In addition, no negotiation is required with the creditors. All ways to save you time and money.
For a review of your situation, call David A. Arietta, a certified specialist in bankruptcy law at (925) 472-8000.