The Honest Truth About Debt Consolidation

Want to know the truth about debt consolidation?  Don’t fall for it. It might sound like a good idea. Until you do it. Then you realize you made a huge mistake.

When I was up to my neck in debt many years ago, I made a huge mistake.  I was one who fell for debt consolidation. I will admit that I was sucked in with the false hope of being able to actually pay less on my monthly bills. The idea of finally getting out from underneath my overwhelming debt gave me hope.

Turns out, I was wrong.  Shocking, huh?  😉

Let me share a bit of the truth about debt consolidation.

MY STORY

I signed up because they told me was that they would be able to consolidate my bills.  They also convinced me that I would have one lower payment.  I was also informed that they’d be getting the interest rates with the creditors reduced.

The thing is, they can’t promise that.  In my case, it did not work that way.  I actually ended up with a higher payment. The only truth to what they said is that I would have one payment.

Each month, they would deduct the total of all my bills (plus their fee) and pay the bills on my behalf.  That did not help me at all. They told me that they would be able to lower my interest rates, which would in turn lower my payments.  Nope – did not happen.  Honestly, I don’t even know if they even tried to get me lower rates.

While my payments were not actually reduced, I know some people who have been successful in that regard.  I use the word “successful” very loosely though, as it was not such a good thing.

WHY IT DOES NOT WORK

You see, if you stay in debt longer and pay less, you actually end up paying more in overall interest.  That is just the way it works.  And, sadly, that is what many of these debt consolidation companies end up doing.  Let me show you an example of how this might work:

Assume you have 2 debts. One is your auto loan and is in the amount of $20,000 and your rate is 18%.  This loan is to be paid in full in 4 years.  Your other loan is $10,000 for unsecured debt and the interest rate is 15%.  This loan will be paid in full in 3 years and the monthly payment is $347.  At this time, your total loan payment is $835.

You walk into the debt consolidation company and they will consolidate all of your debts at a rate of 9%.  They also find a way to lower your monthly payment to $623.  What they fail to tell you is that they have also extended the life of your loan and it will now take you 6 years to pay them off.

Not only that, but your total interest payments will now be $7631 over the life of the debt.  Compare that to $5915 if you had not consolidated.

DEBT CONSOLIDIATION FAILURE

As you can see, it is a myth.  I was only using a band-aid to cover an open wound. This method did not allow me to really tackle my debt.  I was no further ahead.  If anything, I was falling further behind because my debts were not being paid down.  Not only that, I had to come up with an additional amount for the debt agency fee each month.

In my case, I still had to declare bankruptcy (Read more about my own Financial Journey).  For me, debt consolidation did not work.  It made things worse for me.

I do not blame my financial disasters on the companies with whom I worked.  Instead, I take ownership of my debt and financial failure.  I just share with all of you that this is not a good option.  You can not bank on empty promises.

If you are in financial straits and want to work yourself out of debt, there is only one solution and it is not debt consolidation.  You will just need to work hard and pay off your debts yourself — without help from anyone at all.

There is no quick fix to getting out of debt.  The only way to do it is the right way. And, if there were a quicker way to do it, everyone would be signing up.

Now you know the truth about debt consolidation. That being said, if you need help, there are legitimate debt counselors who can do that.  These can be a great resource if you are  truly struggling and can not get ahead.

This post was about those who are out to take your money and who truly will not end up helping you with your debt.

You can visit the National Foundation for Credit Counseling for more information and to find an office near you.  You can also call 866-948-5666 for personalized help.