With near everyone complaining about credit card bills they can no longer pay and mortgages they never should have taken out in the first place, it was just a matter of time before the debt consolidation industry took hold of the public’s imagination. Most people finally seem to understand that, after 2005 congressional legislation, Chapter 7 bankruptcy no longer promises anything to ordinary consumers beyond increasingly dear attorney fees, and, if recent studies are true, our national obsession with unsecured debt continues unabated. An article in the Wall Street Journal announced that the average household now carries a dozen credit cards among their members with a total balance approaching eighteen thousand dollars. Honestly, if anything, it seems odd that Americans did not turn to the debt consolidation approach sooner. Once debts have reached a size and number that makes their speedy resolution untenable, it just makes good sense to examine whatever alternatives now exist. However, it’s one thing to take a look at debt consolidation and quite another to jump blindly into the first program sold by a glib professional promising the world. Debt consolidation may be a solution, but each of the various programs will contain its own share of dangers. More to the point, they certainly shan’t eliminate lifelong burdens without some degree of discipline on the part of the borrower.
Just because we as a people have finally recognized our problems with debt both secured and unsecured does not mean that we are actively striving to fundamentally eat away at the underlying concern. Debt consolidation is sort of a catch-all phrase for many different approaches toward managing financial burdens, and not all of these consolidation programs should be equally respected. Indeed, some of the shadier options could even be considered actively destructive to the borrowers’ household economics. In this essay, we would like to discuss some of the problems that debt consolidation presents for families. While the notion of consolidation has received a good deal more attention of late, the same cannot be said about the details surrounding the various techniques utilized. Also, we would like to introduce some of the ways that consolidation could be simply avoided through hard work and disciplined budgeting on the part of the borrowers. Remember, even though it’s far less damaging than bankruptcy, all forms of debt consolidation should still be viewed as last ditch efforts to repair mishaps or heal poor purchasing decisions from past years. The debts are not going to be eliminated after all, and it’s important that consumers remember that they are still liable for the sums even once they are consolidated. If debtors continue the same careless shopping sprees and knowingly spend more than they earn, than consolidation will have no effect and, once again, could even worsen the borrowers’ overall financial scenario.
One of the main principles you should take to heart when looking at the debt consolidation process should be this adage: the lower the payment, the longer you’re going to be stuck paying off your debt. The less that you pay every month following a successful debt consolidation, it should be understood, will only increase the amount of money that you will pay at the end of the loan after compound interest continues to expand the overall balance. It’s just common sense, really. Put off paying today what you could pay off tomorrow, and you will inevitably owe exponentially more. Most lenders, of course, will never illustrate that philosophy. Consolidation companies’ income largely comes from just this sort of accumulation of interest payments, and they generally try to appeal to borrowers’ (oft delusional) beliefs that they will immediately quit the spending reflexes of a lifetime and devote themselves to patterns of saving that would allow them to repay their loan that much earlier by paying over the minimums. Don’t be fooled by easy flattery and pie in the sky speeches about a sudden change of habits. Most every consolidation professional will attempt to insist that, all of a sudden, you will pay more than the minimum obligation. Know yourself and your buying habits. If you have not been able to restrain spending in the past, there’s no reason to believe that a sense of responsibility will suddenly come your way absent any effort, and, depending on the program, the sudden availability of open credit accounts could just make things worse.
At the same time, though we would certainly advise borrowers to do everything they could to pay down their debts regardless of what the minimum payments are fixed at, one also has to make sure that they do not begin a similarly obsessive strategy of earmarking every dollar earned toward repaying past debts. Much as you would reasonably hope to devote all available funds toward debt elimination, the smart borrower yet maintains a cash reserve to guard against every bad patch. For those loans attached to collateral (equity loans, particularly), it should be of the greatest importance to ensure breathing room. Real estate values have become so tenuous of late that no home owner who cares about their investment (or, more to the point, their family) should dare risk their precious equity for a quick fix, and debt consolidation in the wrong scenario could actually back fire against the consumer. Considering that the financial obligations likely came about through reckless spending, consumers must be very careful not to over indulge their new desire for a clean slate. Loan officers, in particular, are at fault for convincing their clients about the future health of an uncertain property market or evading the depressing but pertinent details about foreclosure and the danger of equity loan consolidation. However the mortgage industry attempts to weather the storm partially caused by predatory lenders acting in their own best interests, the effects of the loans that they pushed upon unwary borrowers continue to bother the national economy.
One should never entirely trust the lenders, after all. Credit card companies and mortgage loan companies depend upon the borrowers’ willingness to sustain payments and extend them for years if not decades. In fact, lenders list each client’s balance as a bankable asset to be sold or traded to other lenders (or, ironically, used as collateral for their own loans). Whatever the lenders’ literature or representatives may say about helping borrowers minimize their debt load with an eye toward eventual debt elimination, their business model explicitly demands a continual revolving debt cycle that forces debtors into a life of servitude, ever subsidizing their financial burdens without actually getting rid of them. We are not necessarily suggesting that you close all cards after consolidation – though, with some programs, that will be necessary – because of the effect that would have towards your credit rating. The ever powerful FICO score likes to see some accounts open to demonstrate that you still maintain some credit viability, and, with all accounts closed, you would be starting again from scratch with no current credit history to draw upon. Ideally, you would maintain one or two of the oldest accounts or the accounts with the largest available balances (interest rates should also be part of this discussion), but it is of sacrosanct importance that these accounts not be used regardless of how much you may wish to resume purchasing. For convenience’s sake, it might be useful to take out a bank card for ordinary spending but only one that has debit purposes without overdraft potential.
All the same, much as plastic may now seem an undeniable essential of the modern consumer experience, there are reasons to still avoid utilizing any cards at all. Studies have shown that household economics are utterly ruined through the casual use of cards credit or debit when attempting to maintain some sort of workable budget. Once families no longer have to count up the prices of the items that they are purchasing, it seems all common sense goes entirely out the window. For this reason, we recommend that debtors – even before they have begun the process of consolidation – attempt to refrain from using cards even during their normal shopping for the household. For that matter, they should try to not even bring an ATM card upon their person and make do with whatever seems reasonable when leaving their house. If you only have twenty dollars to spend at the supermarket, you will be much more inclined to question the necessity of various purchases and also make more of an attempt to comparison shop by trying lower cost brands and such. One should be careful not to ignore the bulk discounts for large families, but, by and large, this sort of tactic goes a very long way in conserving money to bolster savings that can better be used paying down the debts that you already have.
For larger purchases, still, even those most demonstrably needed, the smart household should see the need for such purchases coming well ahead of time and maintain a small savings each week to help pay for the item in cash. While we have to acknowledge that some things may indeed be reasonably justified by resorting to lay away plans – washing machines, say, or refrigerators that suddenly go on the fritz must be replaced – home entertainment systems or family trips or any such leisure indulgences hardly fall under the same guidelines. All the same, even though we understand that vehicles and residences require loans and mortgages, you must make sure that you do not let yourself become liable for more than you really need regardless of what debt consolidation specialists may pretend. Consider previously owned automobiles or smaller homes in less desirable areas of town until you can put a proper amount of cash down: especially considering the stormy forecast of this economy. With regards to property loans, for example, never even think about taking out a mortgage for more than eighty percent of the appraised value. Not only will you have to pay out a so-called mortgage insurance to the lender (in reality, this is less insurance than a extravagant and usurious monthly penalty insuring nothing more than the new homeowner’s foolishness and the lender’s security), it just doesn’t make sense in this time of real estate market instability to gamble with so dear an investment.
Even though refraining from big ticket items you would ordinarily have bought or rigorously cutting down the household budget might require some short term sacrifices, you’re often saving yourself sacrifices farther down the road. The first step, though it can sometimes be difficult, is to take stock of the money that you’re spending each month. Try, even for a week, writing down the amount of money that you spend on groceries, on restaurants, on entertainment, and outlining different things that you may be able to cut back on. Often, it’s easier than you think. Are you in the habit of picking up a coffee every morning before work? Try waking up five minutes earlier and brewing it yourself. If you make a batch and microwave it each morning, you can even save yourself the time. Do you catch a beer each evening after work? Is it imported? See what you think about the domestic brews. Pick up recipes off the internet so that you can have the experience of dining out even when at home. So much money is spent upon the kitchens of restaurants, but, sometimes, even a few degrees of difference can make all the difference between settling and making everything you want out of what you already have.
Not only is this sort of do it yourself approach helpful to paying down bills over a short term debt consolidation, it can have a long term effect when attempting to manage debt over the course of a lifetime. The basic key for any realistic debt control should be to figure out where you’re spending the most of your money and then try to make a couple of small alterations that can make a real difference. Even a slight daily change can be the difference between just barely scraping by and socking away fifty bucks each week for savings or paying down the debt. All of this will clear the way for you being able to live exactly as you want to in the future. Would you rather put all your money toward paying off your debt or investing toward your future. Once you make a solid decision to put your monthly and weekly spending under control and stand behind that with all of your resolves, you can put yourself in the position to get rid of your outstanding debt without even necessarily resorting to external consolidation. And, once you’ve cleared away your debt payments, you’ll find money that you never even knew you had.
Spending is a disease, you know, with symptoms of addiction just as real and just as ruinous as any other addiction. Much as we make fun of supposed shopaholics through tee shirts and bumper stickers, this is no laughing matter, and often chronic behaviors such as purchasing beyond limits can be signs of more serious mental problems. Debtors Anonymous exists for such a reason, and those consumers who feel that they can no longer control their buying impulses would be advised to contact their local chapter. Even for borrowers whose problems aren’t that serious, there are ways to help themselves with what have to be seen as poor habits. Many of the consumers we’ve talked to found some solace in attempting to sell the less desirable evidence of what they had bought. Look through your garage or basement and see what can be sold. So many American families have collected scads of possessions they rarely (if at all) use but which could be readily sold to fuel the debt consolidation payments. Garage or yard sales are the most common avenue toward resale, but don’t forget about classified ads or eBay and Craigslist. In this modern society, it’s remarkably easy to find a buyer for even the most seemingly worthless trifle or create a bidding war for those pieces of value.
Much as borrowers may make strides to change their habits or work to earn more money through traditional employment or the sale of unneeded possessions, we recognize this will not always be enough to sufficiently alter their finances so as to affect consistent debt elimination. For this reason, debt consolidation may be necessary, but we urge each consumer thinking about the process to learn more about consolidating. While there’s a clear limit to what an article such as this could hope to explain, some elements are true throughout. Obviously, no matter which form of consolidation you choose, there’s no clear way to know the terms of your loan until you meet with the professionals you’ve selected to handle the proceedings. While you may be able to at least guess the terms to be offered, the actual interest rates rather depend more closely upon your credit rating and FICO score. Debt analysts look at more than just the score itself, of course. Borrowers who have let debts be discharged (a governmental stipulation that allows corporation to declare debts essentially unrecoverable, though still legally binding, and thus take advantage of the tax breaks surrounding) may have surprisingly decent scores yet be unable still to attain a decent loan because of the associated notes. Nevertheless, as a rule of thumb, just assume that the lower the mid-score (consolidation companies shall pull reports from all three credit bureaus and throw out the highest and lowest numbers) the higher your interest rates shall inevitably be for the final loan.
To a certain degree, the rates you receive from debt consolidation can be somewhat altered regardless of credit scores through the amount of fees paid initially or added to the back end of your loan, but be careful about trying to get clever with professional financiers. Many of these reductions in rate – especially if they are combined with extended terms – will end up only costing the debtor more money in the end. Use one of the on-line debt calculators or speak with a financial analyst unaffiliated with the consolidation company you have been working with to fully understand what ever the supposed discounts will actually entail over the course of the loan and how much additional interest will be added on to the total balance. Remember, while many of the rate reduction programs are to the benefit of the debtors, the firms offering the consolidation yet expect to be paid, and one has to always investigate the worst potential of every possibility for anything regarding your economic future. Even the best companies and friendliest loan officers shall expected to be paid, after all. Debt consolidation should not necessarily be a scam, if you are dealing with reputable companies, but, at the same time, do not mistake the consolidation firm for a charity operation. To repeat ourselves, there are many different forms that debt consolidation may take, and one should never underestimate the depths to which supposed consolidation firms shall sink in their clamor for desperate borrowers.
As an example, many credit card companies will try to tempt you into a form of low interest consolidation by transferring balances, but this rarely works out well for the consumers. The initial interest rates almost always go up – almost always, for that matter, by double digit leaps and sometimes only months after transfer – while the terms essentially assume that delinquencies will occur. Above all else, make sure you do not get wrapped up in one of those payday loan schemes. As their amateurish commercials (comically preying upon the dim hopes of poor debt-ridden souls) should make clear, these loans are the last refuge of the most desperate borrowers and feature interest rates as high and terms as injurious as the law would allow. Much as they may advertise their services as a temporary band-aid to smooth over a spot of misfortune, too many debtors in actuality find themselves unable to pay back the weekly vigorish and find themselves with even greater obligations that helplessly snowball. No matter how much you think you may need the money this very moment, do try any other possible source – from family to employers, whatever the embarrassment – before surrendering your financial security to the naked greed of the worst sort of moneylenders.
Lender’s insurance is another scam intended primarily to defraud the more desperate borrowers newly learning about debt consolidation. Over time, the lender’s insurance can add a large burden to you and your family, but, buying the insurance – or deciding not to buy it – will have no effect on your ability to get a loan. In fact, with the exception of mortgage insurance (which is not actually insurance), it is illegal to require insurance as a condition of getting a loan. Always be aware of all of your legal options and requirements and always make sure not to be intimidated into accepting contractual terms that might harm your finances. If you are taking on the responsibility of a ten-year loan, there is no monthly cost that is too small to matter. Start thinking of a decade as one hundred and twenty months. A fifty dollar monthly fee will come out to six thousand dollars! Any ten dollar fee, even, would be better viewed as twelve hundred dollars over the life of the loan. Have you ever felt like you had an extra thousand to spare for services you’ve never before heard of and do not completely understand? Of course not. The protection offered by credit insurance is minimal at best and usually not worth the egregious costs it would impart to you through the terms of the loan. Borrowers need to seriously ponder over the importance of such elements before signing any papers.
At the very least, whenever faced with these sort of add-ons to debt consolidation packages, you should do your research before simply listening to whatever the nice man in the expensive suit has to say. Try to put a monetary value on the protections offered by insurance, and, once you have fully understood exactly what they will and will not do, weigh them against the additional monetary hardships that the protections would cost you over the years. Above all else, do the math. Car insurance makes sense because it will protect you against sometimes catastrophic damage and injury, and, as compared to a relatively small monthly payment, one can hardly argue against. Chances are, you won’t get in a terrible car accident any time soon, but the insurance proves its worth because the financial cataclysm of such a crash would be more than any individual could be able to bear. But ask yourself: is the same situation true of credit insurance? Credit insurance more often preys on your fears to extort money from you, but this system often offers little in return. Don’t fall for the credit insurance, and, more to the point, you should question any debt consolidation company that continues to push such an additional cost for so little reason. Credit insurance is one of countless components to debt consolidation programs with demonstrably negligible value that these companies and their salesmen tack on to the larger program for nothing more than a greater pay day.
Still and all, there is a point to debt consolidation when done correctly. Borrowers must choose which consolidation program will be the best fit, still. Consumer Credit Counseling options have been largely abandoned by reputable debt advisers in recent years after it was discovered that most of these companies have accepted payments from the credit card firms they were supposed to be working against. Debt settlement negotiators, on the other hand, have grown more and more popular of late. Like most of the consolidation firms, they’ll take on to their own books their clients’ debts once accepted (which is hardly a fait accompli; borrowers must demonstrate both a willingness to cut back spending and a capacity to earn sufficient income to repay loans within five years) and then duel with the credit card conglomerate representatives with the debtors’ balances as prize. Believe it or not, successful debt settlement firms – these counselors are actually certified by a national board – can cut their clients’ overall debt load by as much as fifty percent through initial negotiations. Remember, though bankruptcy remains a horrible corrosive faux solution for most borrowers to have enjoyed employment over the past few years, Chapter 7 debt elimination remains a frightening option for every lender, and, because of this, debt settlement techniques have been proven to attain seemingly miraculous results for their debtor clients.
There remains a point to debt consolidation, to be sure. With many of these programs – again, debt settlement firms should be looked at most favorably – there are benefits to be found. Of course, even debt settlement isn’t perfect. While the effect upon credit reports cannot compare to the ravages seen once Consumer Credit Counseling or bankruptcy protection has been recorded by the three credit bureaus, any settlement notation still does lower FICO scores for a brief amount of time. Nevertheless, should you genuinely need the services of debt consolidation and find a reputable company within your community, it wouldn’t make any sense not to at least investigate the options providing they offered free consultations. For that matter, many of the more legitimate debt settlement and debt consolidation firms are now available through the internet and can provide their assistance remotely. There’s never any harm to checking what’s out there once you’ve realized that your debts must be dealt with. For all the mistakes and malicious business practices that we have tried to illustrate, your authors do recognize the importance of debt consolidation for many families that have nowhere el