Debt consolidation could be your choice between debts and ‘further debts’!

Debt consolidation could be your choice between debts and ‘further debts’!

In today’s expanding global consumer market, most of us are somehow linked to loans and debts. The most authentic witness to this presumption is probably our wallets that bear one or more credit cards. Easy access to credit programs provided by banks and financial institutions through credit cards or other attractive loan schemes encourage us to get into more debts everyday. Sometimes these loans pile up into a burden that we can no longer bear. Amongst many solutions to this financial distress, one of the most popular is debt consolidation loans/programs or simply ‘debt consolidation’.

Debt consolidation is a technique of accumulating a number of debts or liabilities into one loan/debt scheme. A debt consolidator (bank or institution) gathers all the debts of a person and combine into a single loan. Thus the borrower can payback his debts more simply and usually at more reduced rates.

Debt consolidation may seem to be a savior especially when you have several credit card debts. You do not have to write several pay-cheques to different addresses. Your monthly installments become easy to bear. But how does a debt consolidation offer this? Surely they secure their profits. Usually under a debt consolidation, you pay the reduced premium over a long time in more number of installments. That way, your ultimate payment of debts becomes very high with interest. Debt consolidation can be extremely useful if one manages his finances well. It also depends on who is offering the debt consolidation loans? It must be a reputed bank or institution. If however, you are not good at your personal finance management, a debt consolidation may as well become a Pandora’s box, putting you in further troubles with debts.

Now let us try to understand debt consolidation with a simple math. Say, you have two unsecured credit card debts totaling $25,000. One with $15,000 (at 12% APR over 2 years) the other with $10,000 (at 13% APR over 4 years).

For the first debt, your monthly payments (premium + interest) become [($15,000x12%)/12 + (15,000/2/12)] = 150+625 = 775. (Total amount payable over debt period is $775x12x2 = $18,600)

For the second debt, your monthly payments (premium + interest) become [($10,000x13%)/12 + (10,000/4/12)] = 108+208 = 316. (Total amount payable over debt period is $316x12x4 = $15,168)

So you pay 775+316 = $1091 each month (and ultimately $33,768) for two debts. Now if you go for a credit consolidation, you may be offered a very low APR of 9% with monthly payments as low as $700. This is much better than 12% or 13% APR and monthly payments of $1091.

Now your debt consolidator would not say that this reduced payment will have to be made over a very long time, say, 6 years. Thereby ultimately you will have to pay a very large amount $700x12x6 = $50,400 as compared to pre-debt consolidation amount of $33,768. This calculation shows the stakes at both sides. This is why debt consolidators are interested to manage your credit cards in a better (?) way and they are in growing business.

Debt consolidation can be helpful to relive you of the complexities involved in multiple debts. However, every month as you pay less, it may also allure you to go into newer shopping spree with involvement in newer debts. Analysts have discovered this natural instinct amongst the persons under a debt consolidation. They usually use their credit cards more after the debt consolidation and sink in more debts. To get the maximum benefit from a debt consolidation, you need to control your expenses (especially credit cards) during its payment period – this is probably the best debt advice one can give.

Article Source: http://www.rightarticle.com

Ty Lee is author of this article onCredit Card Consolidation. Find more information aboutCredit Card Debt Consolidation here.

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