Does Debt Consolidation Really Work?

The truths and myths of debt consolidation leave many scratching their head and wondering, does debt consolidation really work? Several vantage points provide varying perspectives on the issue, including the perspective that debt consolidation does not really treat the problem, but only temporarily relieves the symptom. Let’s take a look at a few statistics.

It is reported that a member of a known debt consolidation firm reviewed his internal statistics and revealed that 78% of individuals re-accumulated their debt after debt consolidation. Now, they’ve just compounded their debt! And that’s not the worst of it; you actually end up paying more interest in the long run through a debt consolidation than without. But hang on, we’ll get to that in a minute.

So why does debt consolidation seem so appealing? It’s simple, because firms are throwing lower interest rates and lower payment options your way. It sounds like a win-win scenario. However, upon further review (and reading the small print), you’ll see that the lower interest rates and lower payments are actually the result of an extended term in most cases. So while you are seemingly saving money through a lower payment, you are actually in debt for a longer period of time and, ironically, accumulating more in owed interest to the debt consolidation firm than your original creditors.

Here’s an example:

Setting up the scenario: Let’s say you have a total unsecured debt of $30,000, which is comprised of a two-year loan for $10,000 at a 12% interest rate and a four-year loan for $20,000 with an interest rate of 10%. Looking at these numbers, you recognize that you owe $30,000 to your creditors and your payments include a monthly payment of $517 to the first loan and $583 to the second loan. Add that together and you’re paying $1,100 a month toward your $30,000 debt.

What debt consolidation offers: In this example, we’ve determined that you’re paying $1,100 each month to pay off your debt. A debt consolidation firm now tells you that you can roll your debt into one loan with a lower payment and a lower interest rate. The debt consolidation firm now tells you that instead of paying $1,100 a month, you can pay $640 per month at a 9% interest rate. At first glance, it sounds like the numbers are amazingly in your favor! Why wouldn’t you jump on this? Well, let’s do the math.

The conclusion: Now that you’ve been given this offer, you realize the debt consolidation firm has your consolidated loan at a six-year term (no longer two or four years). With a six-year term, you will now pay $46,080 on your original $30,000 unsecured debt. Had you not consolidated and continued paying your original loans, your total payoff would have been $40,392. Plus, you would’ve been out of debt two years sooner! By consolidating your debt, you just paid $5,688 more than you would have originally paid.

So, does debt consolidation really work? Are there better alternatives available to provide debt relief? Contacting a debt relief lawyer or bankruptcy lawyer can offer insight into the options available to you and your struggling financial situation to help determine what will work best. If you’re located in New York state, learn more by talking to a bankruptcy lawyer.