Why debt consolidation can be bad !!

Deep in debt ?

Too many loans you cant keep up repayments with  ?

In trouble with credit card debts ?

Debt Consolidation – Life saver or  Rip off

Go to any bank or  financial consultant   with his kind of problems and it is likely they will mention a solution called “Debt consolidation”. True  Debt consolidation can be a savior for some , but It surely can also put many people in a financial situation worse off than they already are.

How you may ask , is that possible ?

Lets take a  simple example with  without any figures or loan repayment percentages to make it easy to understand ?

Say you got  three debts

1.Credit card  – Term  Rolling

2.Car loan –  Term  5 years

3.Personal loan  – Term  5 years

Taking an example of the above loans getting consolidated into a (Home loan –  Term 30 years )

Now given that these above  3 loans that  you have taken  are for short terms ( rolling and 5years) and you are paying interest only for a shorter period,  this totally changes when you lump it together with your (Not so Short ) 30 year Home loan. which means  Now you  are paying interest  for a 30 year term on those loans  instead of 5years, which can make you repayments go for thirty years instead of five , which in many circumstances  you can end up paying much more than you intended too.

Debt consolidation with refinancing loans

With debt consolidation loans  or refinancing loans the lender can end up charging you higher interest rates than you’re paying now — as high as 21% or 22%. “Your monthly payment may be lower” with one of these loans, “but you’ll end up paying more,” Personal unsecured debt consolidation loans carry high interest rates, sometimes higher than credit cards.

Help :

http://www.nfcc.org/

You can get help from an organization like National Foundation for Credit Counseling (see link to left). NFCC has branches throughout the country; they are a non-profit, community organization that provides free and confidential debt management advice to anyone who needs it. You can even consult with them over the phone

Sometimes it is better to negotiate settle the debt  in a debt settlement strategy. Check out this book  which describe a easy way to get out of debt. There are some softwares for reducing and managing debt as well that is available on the market

Links:

Avoid-the-trap-of-debt-consolidation/

http://moneycentral.msn.com/content/savinganddebt.asp

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