DOOR NUMBER ONE:
Here's a simple multiple-choice test question:
Debt consolidation is:
a) Borrowing enough
money from a bank or finance company to pay off all your bills at one
time, leaving you with a lower interest rate and a single lower monthly
What is your guess? Most people we speak to pick (a), because that is what most people think of as true debt consolidation. However, the correct answer is (e) "all of the above."
Now, let's take each one of these variations on debt consolidation in turn.
a) BORROWING - Say you owe $25,000 in credit card debts, to be consistent with our previous example. Remember that it will take you up to 25 years to pay off those debts with minimum payments, depending on how the bank handles the interest calculations.
If you go to a finance company instead, and borrow $25,000 at 12% interest, with a $400 minimum monthly payment, you'll have the loan paid off less than 9 years using a lower monthly payment. Sounds better, right?
There's a problem though. Who's going to lend you $25,000 without collateral (like a house or other property)? In the real world, few people who do "consolidate" are accomplishing what we've described here.
What's more, very few people who are in financial trouble have access to the credit necessary to borrow the lump sum in the first place. If you're behind on your payments, expect that to show up on your credit file, so in turn expect to get refused by every loan officer in town.
If you're still current on your payments, you might pull this off, but it's still unlikely that you'll be able to borrow enough to solve the problem. (Many people simply add to their debt by obtaining another line of credit, which then becomes part of the original problem.)
This is also where the scam operators flourish. Desperate consumers respond to advertisements for "guaranteed loans." The ads state "no credit check required" and offers attractive terms. BEWARE: These are usually variations on the "Advance Fee Loan Scam." The catch is that the operator on the other end of the telephone asks for a payment up front in order to process the application, anywhere from $25 to $300 or more. You send the money and never hear about the loan, or you are turned down for the loan.
People in financial difficulty are usually too broke to hire an attorney to chase the scam artist who ripped them off, or they're simply too embarrassed to go after them. Don't fall for this con game. If you're going to borrow money, do it in your hometown, where you can look the lender in the eye!
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