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Debt Consolidation
- Good or Bad?
by Lee Masterson
It seems that everywhere you look these days you can find
ads trying to entice people to consolidate
debts.
The usual catch-cry goes something like this: "Put
all your personal debt (car loans, credit cards etc) into
the home mortgage AND cut your repayments in half!"
Let me tell you - those ads are RIGHT.
You really could cut your monthly repayments in half.
Imagine how much extra money you're going to have in your
pocket each month if you just called a consolidation
company and let them fix it all up...
What those companies DON'T tell you is that when you consolidate you could end up paying
WAY more money in the long run for something you probably
don't even own any more.
How They Do It
Let's look at the sales-method calculations used by
consolidation companies and see how they really CAN
halve your monthly repayments.
Example:
Home Mortgage: $120,000 at 7.5% over 30 years = $839.06
per month
Car Loan: $15,000 at 10.25% over 5 years = $320.55
per month
Credit Card: $5,000 limit at 18.25% = $80
per month (interest only plus small nominal payment)
Your total monthly expense for the example above is: $1,239.61 per month.
Now, your consolidation company would tell you that if
you put your personal debts into your home mortgage
and refinanced them, you could cut your monthly payments
dramatically!
If you refinanced your home mortgage to include your
personal debts, then your NEW loan amount would be
$138,000 ($120,000 + $12,000 + $5,000 + $1,000 closing
costs = $138,000)
New repayments for a loan of $138,000 at 6.5% over 30
years = $872.25 per month
That's a potential saving of $367.36
every month. Wow! An extra $367 in your pocket every
month. Imagine what you could do with that! No wonder
those debt consolidation ads are everywhere you look.
Okay - we didn't cut your repayments in half, but you can
be sure that if I'd used bigger numbers and higher
interest rates, I could have worked out a way to show you
a GREAT sales pitch for consolidating your debts.
How We See It
The reality of the situation is a little different...
You see, if you continued to pay your $15,000 car loan at
$320.55 per month for 5 years, then at the end of 5
years, you would own that car.
Paying $320.55 per month x 60 months (5 years) = You
would have paid $19,233 for that car
over 5 years.
But if you consolidate that $15,000 into your home
mortgage, it will take you up to 30 years
to pay off the same car. Let's see what happens if I work
out the cost now...
$15,000 at 6.5% over 30 years = $94.81 per month x 360
months (30 years) = $34,131.60 for the same car!
Would you pay $34,131.60 for a car you know should only
have cost $15,000? I know I wouldn't!
I'm guessing that in 30 years time you won't even have
the same car any more, so you'll probably be paying off a
different car (or two) by then AS WELL.
The same principle applies to your credit card. Will you
even remember what you bought for $5,000 in 30 years
time? Not likely?
Before you consolidate your debts onto your home
mortgage, ask yourself if you couldn't perhaps budget
your current income just a little differently to avoid
having to get into a situation that just keeps you in
debt even longer than you already will be!
Lee
Masterson is a freelance writer from South Australia and
is one of the founders of MortgageLoanHints.com. She has
worked in banking and finance for more than 10 years and
now spends much of her time trying to help people control
and manage their debt. You can find more of Lee's
articles here: http://www.mortgageloanhints.com
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