Debt Consolidation does have a certain ring to it... doesn’t it? It sounds like all your debt can be stuffed into one little neat package and by magic it becomes smaller. Somehow it becomes more manageable, more contained. Well, we don’t mean to burst your bubble but Debt Consolidation is nothing more than another loan. You borrow money to pay off debt.
Debt consolidation loans may be a good solution for those who are still on top of their debt load, just looking to simplify it. For others, it often causes deeper financial trouble by masking the debt with a lower monthly payment, only resulting in slower payoff (if you can continue making the payments) additional interest, and fees. Remember, You cannot borrow your way out of debt!
The nuts and bolts of the consolidation loan basically consist of a transfer of debt from one place to another, usually "consolidating" several loans into one larger loan. (For example transferring the unsecured debt into a secured Home Equity Line Of Credit.) The debt itself is not lowered, only transferred. Often, this transfer has a fee as high as 3% or more. Basically, by consolidating, you increased your debt and lengthened the time you will be paying on it. In many cases, in order to lower interest rates, this loan comes in the form of home equity or other secured loan options. The benefit is a lower APR. The tricky part is now your loan is secured, putting your collateral at risk if it doesn't work out, and in some cases "forcing" bankruptcy in order to save your home. This solution is obviously no solution for secured debt issues as it only generates more of it!
What is interesting about consolidation is the low success rate of less than 2%! Why? Usually due to the fact that this only "buys time" and is not a real solution. For those needing solutions, look elsewhere!
Each person will define his or her own parameters for success.
You must analyze your own situation and decide what is best for you. Ultimately, if you are unable to pay your debts as they stand, consolidation may not be a good choice.
Also less people are able to qualify for debt consolidation due to plummeting real estate values, this option has lost popularity as a debt relief choice in recent years but is still is an obtainable option to a very few people who qualify. Even though the low monthly payments available under this option can seem attractive, don‘t be fooled by this option because it is by far the most expensive option to for getting out of debt. Since in this option you will be paying one hundred cents on the dollar, you would have to borrow $40,000 plus pay closing costs of about $1,200, for a total loan of $41,200 to be paid back at 9.5% interest over the next 15 years. This option would have a monthly payment of about $431, but it would last for a full 15 years, or 180 payments. The total amount paid back would be the $41,200 principal plus interest of $36,240 for a total amount of $77,440, or 194% of the original debt! But hold on. What about the interest deduction available on the home equity loan from my taxes? Based on a total interest payment of $36,240 and again assuming a 15% federal tax bracket, you would save a total of about $5,436 in taxes over the 15 years. Even if we deduct this sum from the total paid you would still end up paying $72,004 back on $40,000 in credit card debt – this is a very poor deal.
Want More Information?!
Simply Enter your Information Below to Grab your Report!
Visit us @ Freedom From Creditors For Best Option Available!
No comments:
Post a Comment