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Welcome to Debt & Financial Advice |
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Free Debt Consolidation Advice – Debt and Financial Advice |
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Debt Consolidation: The Pros and Cons
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When you look at the financial status of the average person, the statistics are grim: the average adult in North America today carries $38,000 in consumer debt (credit cards, lines of credit, auto loans, etc.); according to the US statistics, in recent years, more people filed for bankruptcy than graduated college; and the most common reason given for divorce today is money and money fights. Obviously, getting control of debt is crucial in today’s society.
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The old proverb states “the borrower is slave to the lender”, and breaking those chains can be difficult. One of the more common and most heavily advertised methods is debt consolidation—the process of lumping all your debt (or at least a significant portion) together and paying one payment instead of many.
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There are many ways to consolidate, but none are without risk. One of the more popular debt consolidation methods for home owners is a Home Equity Line of Credit, or HELOC. The concept is simple—borrow a sum of money (in some cases up to 125% of your home’s value) using your home as collateral. Use that money to pay off credit cards, auto and student loans and any other money you owe (or go on vacation). Now you have just one “low” payment (low when compared to the multiple payments before).
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The risk comes in when Murphy (with his fancy laws) comes knocking on your door. When you are unable to make the payments as the bank would like, instead of sending your account to a collection agency, the bank takes the keys to your house as repayment of the loan, leaving you not only broke, but homeless as well.
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An alternative to borrowing money to repay borrowed money is to sign up with a debt consolidation service. There are dozens of these services waiting to help you lower your monthly payments. In some cases, they will work with your creditors to lower your interest rates and in some very special cases, your balance as well. You write a check to them and they distribute the money to your creditors.
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But risks abound when adding a middle man. The Better Business Bureau’s reports on these companies are full of complaints—from credit card companies coming after the debtors for the difference in monthly payments to paying a firm over $5000 over 12 months, and then being surprised when his creditors call and say they haven’t received a single cent in a full year.
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Using a debt consolidation service can act as a gray mark on your credit report—whether or not it is negative depends on who is reviewing the report. That means it may end up costing you more in the long run if you decide to borrow money again. Many times, after getting information from the debt consolidation service, you can cut a better deal with your creditors yourself. You wouldn’t have the convenience of one payment, but you wouldn’t have to deal with the middle man.
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If, after weighing all the pros and cons, you do decide to use a “credit counseling” debt consolidation service, there are a couple things to remember.
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First, don’t do anything until you get EVERYTHING in writing. “Everything” includes 1) your monthly payment, 2) a breakdown of the monthly payment to each creditor, 3) a complete payoff schedule (how long it will take to completely pay off your debt—assuming you did not get into more debt in the process), 4) assurances that each creditor has signed off on the deal, and 5) a detailed outline of the company’s liability if the above-mentioned terms are not met.
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Second, before you send your first consolidation payment, call all your creditors to double-check they’ve signed off on the deal. You may have to speak with someone in a higher department (such as the in-house collection department) to find someone with some “power.”
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Thirdly, when you’re on the phone verifying compliance, make sure to request that you get a statement each month to confirm the debt consolidation service is living up to their end of the deal and sending the correct payment to the correct creditor each month.
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With those three things in place (making sure that the consolidation service knows that they will be held responsible if the conditions are not met, you are ready to send the first check.
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The biggest risk to all of these consolidation approaches is that none of them address the real problem: the person in the mirror that accumulated all that debt to begin with! While consolidation works mathematically, what usually happens is that you end up using the extra space in the budget to rack up more debt. That means that if you are planning to consolidate, you also need to plan your spending. There are dozens of financial self-help resources out there, but if you don’t have a direction, you’ll end up back where you were with twice the debt.
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So what should you do with the extra room in your budget? Well, pay off debt! Whether you have a HELOC, go through a service, or negotiate yourself, use at least half of your saved money to make extra payments on your debt. You’ll get everything paid off faster and in a few years when you’ve paid your $38,000, you can truly unlock your ultimate wealth-building tool—your income.
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Thank you to R.M. Strong for this “Free Debt Consolidation Advice” article.
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