The truth regarding loans for debt consolidation - telling it like it is
Do you go to your mail box hoping for some good mail, only to find bills? Do you feel like all you ever get in the mail is bills, bills and more bills? You may have even reached the point where you actually look forward to receiving junk mail because it is better than bills! Then every now and then you may get some mail that catches your eye and one such envelope that regularly catches people's eye is the one with the offer of a debt consolidation loan.
The offer they give sounds so good and could be the answer to your financial worries. If you could get this debt consolidation loan then you would only have one loan and you could pay off all your other creditors. A debt consolidation loan is the mail you've been hoping for and could really turn your life around, or can it?
There is a catch to these types of loans. You see if you are in a position that you need a debt consolidation loan then you are considered high risk and as such you will be charged a high interest rate. To get a low interest rate you need to be low risk, but if you were then you wouldn't need the debt consolidation loan to begin with. So the more money that you owe the higher the interest rate you have. Those people who really need this type of loan are the ones that get charged a high rate.
But of course the lenders offering debt consolidation loans paint a very nice picture and promise you monthly payments that are much lower than your current monthly payments. So it must be better financially if your monthly repayments are lower than what you're currently paying right? Wrong!
Sure your monthly payments will be lower and that is a huge advantage if you are really struggling to make ends meet, but it is only an advantage for the short term. The reason the monthly payments are lower and yet the loan is being charged at a high interest rate, is that the loan is taken out over a much longer term than the term of your current debts. So although the monthly payment is lower you may be paying it for a number of years longer which means that you actually pay more money long term.
Here is an example of how it works:
Let's say you have a number of debts spread over several creditors and all up they total $11,000. The average interest rate on these debts is 14% and you have five years left to pay it all off. The total amount you are paying monthly would be around $260. If you decide to consolidate all your debts into one consolidation loan for $11,000 you may get a deal that has your monthly repayments at $190 - that's $70 less than you are currently paying.
When you look further into the debt consolidation loan offer you see that the interest rate being charged is 17% as opposed to the average rate of 14% that you are paying now. Perhaps that isn't so bad, it's only 3% more and you are saving $70 a month - doesn't really make sense though does it - to have a higher interest rate yet lower repayments. Look further into the loan offer details and you will find that the reason is that the loan is taken out over a period of 10 years. Your original debts, paid at $260 a month, would have been paid off in 5 years.
Let's take a look at how much you would pay in total over the full term of the loan.
Option #1 - continue with current debts paying $260 a month over 5 years will cost you a total of $15,600
Option #2 - take the consolidation loan paying $190 a month over 10 years will cost you a total of $22,800
So even though you are saving $70 a month now, you are actually paying $7,200 more in interest over the full term for paying off the same debts. If you average that out over 10 years you are actually losing $60 a month rather than saving $70 a month.
The problem is that when people see debt consolidation loan offers they only see the savings that they are going to make each month. They don't learn all the details and read the fine print to see that they will actually be paying more money long term. The good news is that although a large number of debt consolidation loans are structured this way, not all of them are. You may find a good consolidation loan that will give you a good deal short term and long term. It is important to always read the fine print and learn everything there is to know about a loan before making your decision.
TAGS: truth regarding loans for debt consolidation
Article Source: Messaggiamo.Com
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