Is debt consolidation authentically necessary? Perhaps. It authentically can seem like the easy way out of the qoute of too many payments every month. When reputation card and loan payments add up to 0 every month, why not pay all of these debts off and have a nice easy payment of say, 0? There are two reasons why it may be a bad idea.
Debt Consolidation Ignores Causes
Debt Consolidation Help
Why do you have too much debt? Entirely unforeseeable circumstances? That's rarely the whole cause. More often, when you have debt problems, it is because you buy too many things on credit. In other words, if you are seeing for a consolidation loan it is probably due to bad financial habits.
What happens when you couple all those debts? You don't owe less. You may get a lower interest rate on average, but you still owe all the money, right? The consolidated debt is just easier to pay. It will be paid with one lower monthly payment stretched out over a longer period. That's easier, but what else becomes easier now? Having more debt.
Isn't this exactly what many people do? They get 0 in assorted payments rolled into a loan with an easier 0 payment, and now they have excess revenue again. Time to buy some things on credit. Debt consolidation can be a way to postpone reckoning with the real qoute - bad financial habits. Unfortunately, when you put off dealing with the real causes of debt, the qoute becomes much worse.
Debt Consolidation Is Expensive
Because of the lower interest rate, it seems like you are salvage money with some consolidation loans. This isn't always true. Most often you are converting short-term debt into long term or longer-term debt. The qoute here is that the more time you take to pay off the money you owe, the more you pay in interest.
Suppose you owed ,000 on a reputation card, with 18% annual interest. It would wish a payment of 6.26 per month to pay it off in four years, and you would pay a total of 60 in interest. Now suppose you rolled the debt into your 30-year mortgage on your home (many people do this), with only a 7% interest rate. This would add .92 to the payment. That's easier than 6, and a much lower interest rate, so how much total interest will you pay over the years? 71 - more than the traditional debt!
Naturally there are debt consolidation loans shorter than 30 years, but you get the point. Even with a 15-year, 7% loan, which would costs .93 per month, you would pay at least 50% more in interest than with the 18% 4-year payoff. Converting your short-term debt into long term debt can cost you a lot more in interest.
The lesson? Try hard to make those payments and get rid of that debt sooner. You'll be glad you did. What if it is impossible to make those payments? This happens, but for a reason, so why not work at least as hard on changing your habits as you do on getting the best consolidation loan.
Is Debt Consolidation A Good Idea? Debt Consolidation Help
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