Credit Card Debt Consolidation

Debt consolidation seems appealing because there is a lower interest rate and monthly payment. However, the reason the payment is lower is not because the rate is lower but because the term is extended. If you stay in debt longer, you get a lower payment, but if you stay in debt longer, you pay the lender more.

Debt Consolidation Loan Example
For example, let's say you have $30,000 in unsecured debt, including a two-year loan for $10,000 at 12%, and a four-year loan for $20,000 at 10%. Your monthly payment on the $10,000 loan is $517 and $583 on the $20,000 loan, for a total payment of $1,100 per month. The debt consolidation company tells you they have been able to lower your payment to $640 per month and your interest rate to 9% by negotiating with your creditors and rolling the loans together into one. Sounds great, doesn't it? Who wouldn't want to pay $460 less per month in payments?

But what lenders don't tell you is that it will now take you six years to pay off the loan. This may not sound that bad to you at first unless you realize how much more you will actually pay in additional payments. You will now pay $46,080 to pay off the new loan vs. $40,392 for the original loans, even with the lower interest rate of 9%. This means you paid $5,688 more for the lower payment. Not such a good deal after all. This example shows you why they are in the business – because they make money off of you.

Debt Management Plan (DMP)
A Debt Management Plan (DMP) is a repayment plan which may help you pay off your unsecured debts, including your credit card debts, in full in five years or less. DMP is a method used for paying personal unsecured debts when individuals are experiencing an immediate financial hardship and are unable to meet their current financial obligations. By consolidating your debts into one convenient monthly payment, the DMP may offer significant savings from participating creditors in both interest and repayment terms without putting your home or other assets at risk.

Participation in a DMP is restriced to unsecured creditors such as credit cards, personal loans, medical bills, retail store cards, and unpaid collection accounts. Secured debts like mortgages, car loans, rent and utilities, are not subject to monthly payment reductions.

Surveys indicate clients who have remained in a DMP for over a year report the following impacts:

• Lower levels of financial stress
• Feel better about current financial situation
• Doing better at paying rent/mortgage and bills on time
• Not pre-occupied with financial concerns
• Started contributing to retirement plan
• Feel more financially secure
• Less frequency of financial concerns interfering with work
• Missed less time from work because of inability to pay for child or elder care
• Missed less time from work to handle personal financial matters
• Less frequently bothered with health related problems
• Improved family relationships
• Improved sleeping patterns

If you or someone you know is feeling overwhelmed by debt, discuss your options with a Certified Financial Counselor by calling 1-800-351-4195 for a free confidential consultation. Counseling is available in-person, by phone or online.

**NOTE: DMP IS NOT AVAILABLE IN ALL STATES. A DMP alone is not credit counseling and DMP's are not for everyone. You should sign-up for one of these plans only after a Certified Financial Counselor has thoroughly reviewed your financial situation. Counselor may answer general questions about bankruptcy, but cannot give legal advice. If legal advice is necessary, client should seek the appropriate assistance.