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Pros and cons of debt consolidation programs

Last post 03-03-2012 2:29 PM by jazmartinn. 11 replies.
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  • 11-16-2010 9:24 PM

    Pros and cons of debt consolidation programs

    I am looking for any experiences, positive or negative, that readers may have with debt consolidation programs. The one I would particularly like to be able to evaluate is called the ManuLife One Number program here in Canada where I live. This "bank" sells itself as a single loan source that is secured by the value of our house. They offer to pay off our mortgage and line of credit debts from the single loan and thus reduce the different charges paid on them at varying interest rates. All my income (pension mainly) and that of my wife is paid into the account and I have access to it and to the credit established on the value of the house we live in. My regular and irregular payments for any expenses are made from this account. The bank calculates interest daily at a simple not compound rate. I calculate that I will be paying $588 per month less to this bank than the traditional one I have been dealing with for the last 28 years. It does not worry me if I don't pay off this loan but with these savings I have a better chance to than with a traditional mortgage. The loan rate is 3.5% My fear is that I am not seeing some obvious flaw in this arrangement. Can anyone help my aging financial eyesight please ?
  • 11-17-2010 7:39 AM In reply to

    • Brandy
    • Top 10 Contributor
    • Joined on 03-28-2007
    • Saving in South Mississippi
    • Posts 25,145

    Re: Pros and cons of debt consolidation programs

     Does anyone have an answer on this one?

     

    The Dollar Stretcher Community Manager



  • 11-17-2010 8:03 AM In reply to

    • rolo
    • Top 50 Contributor
      Female
    • Joined on 04-04-2007
    • Michigan
    • Posts 1,928

    Re: Pros and cons of debt consolidation programs

     From my financial advisor:  

    Myth: Debt consolidation saves interest, and you have one smaller payment.


    Truth: Debt consolidation is dangerous because you treat only the symptom.

    Debt consolidation is nothing more than a "con" because you think you've done something about the debt problem. The debt is still there, as are the habits that caused it – you just moved it! You can't borrow your way out of debt. You can't get out of a hole by digging out the bottom. True debt help is not quick or easy.

    Larry Burkett, noted financial author, says debt is not the problem; it is the symptom. I feel debt is the symptom of overspending and undersaving. Our financial coaches will not recommend debt consolidation for a client. Why? Because debt consolidation doesn't work.

    Debt Consolidation Statistics

    A friend of mine works for a debt consolidation firm whose internal statistics estimate that 78% of the time, after someone consolidates his credit card debt, the debt grows back. Why? He still doesn't have a game plan to either pay cash or not buy at all. He also hasn't saved for "unexpected events" which will also become debt.

    Debt consolidation seems appealing because there is a lower interest rate on some of the debt and a lower payment. However, in almost every case we review, we find that the lower payment exists not because the rate is actually 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, which is why they are in the debt consolidation business.

    Debt Consolidation 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 they don't tell you 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.

    The Real Way to Get Out of Debt

    The answer is not the interest rate; the answer is a Total Money Makeover. The way you get out of debt is by changing your habits. You need to commit to getting on a written game plan and sticking to it. Get an extra job and start paying off the debt. Live on less than you make. It is not rocket science, but it is emotional, which is why most people need help getting through it from someone like Dave Ramsey. Don't try debt consolidation!

    http://www.daveramsey.com/home/

     

    Lorrie

    "People take different roads seeking fulfillment and happiness. Just because they're not on your road doesn't mean they've gotten lost." ~~ Dalai Lama XIV -

  • 11-17-2010 10:32 AM In reply to

    • Brandy
    • Top 10 Contributor
    • Joined on 03-28-2007
    • Saving in South Mississippi
    • Posts 25,145

    Re: Pros and cons of debt consolidation programs

     Rolo, I am of the mind that debt consolidation is a desperate fix to a situation. Habits have to be adjusted for lasting change that can mean better finances in the future.

    Not being Canadian though, I wonder if the programs are the same.

     

    The Dollar Stretcher Community Manager



  • 11-17-2010 2:15 PM In reply to

    Re: Pros and cons of debt consolidation programs

     Hi Dave.  Consolidation loans are only good IF IF IF IF you have already taken care of the problem that got you into debt in the first place. And you can do it yourself!  This question has come up so often with people I talk to in person or online, I created an article to address it :

     http://www.household-budget-made-easy.com/credit-card-consolidation-loans.html

     The big red flag I see you in your post is

     

    It does not worry me if I don't pay off this loan ....
    .

     And I think this is the "obvious flaw" you ask of.  With this mindset, you will never be financially free.

    All my income (pension mainly) and that of my wife is paid into the account and I have access to it and to the credit established on the value of the house we live in. My regular and irregular payments for any expenses are made from this account

    You lose control.

     

    I calculate that I will be paying $588 per month less to this bank than the traditional one I have been dealing with for the last 28 years.

     Either this is an incredibly high loan amount or there is another fact of the agreement not yet revealed.

     In the end, you have to do the calculations and put both systems side by side to determine which one makes financial and emotional sense.

    Helping you to learn, earn, and serve,

     David

    I am a Personal Financial Coach helping individuals across the country save money, get out of debt, and live financially free without selling insurance, investments, or fancy software. Just plain 'ole common sense principles that work.
  • 11-17-2010 8:03 PM In reply to

    Re: Pros and cons of debt consolidation programs

    http://gailvazoxlade.com/blog/archives/2230

    I think this is similar to Manulife and Gail does a great job explaining it.  not really a good idea.

    Officially recognized Stretchpert in Hobbies and Crafts
  • 11-17-2010 9:51 PM In reply to

    Re: Pros and cons of debt consolidation programs

    Ok cons

    1. call the bbb if you are not thrilleed about the place

    2. its not fdic'ed

    3. the person went to a fly by night school and got the deplomia from a box of cracker jacks kid snack...

    Pro

    1. it is fdic'ed

    2. no complaints against the place

    3. no cracker jack  diplomias and the person knows what needs to be done

    3. And it is registered with irs so takes planning ..

  • 11-18-2010 1:55 PM In reply to

    • Brandy
    • Top 10 Contributor
    • Joined on 03-28-2007
    • Saving in South Mississippi
    • Posts 25,145

    Re: Pros and cons of debt consolidation programs

     

    cheapChic:

    call the bbb if you are not thrilleed about the place

    2. its not fdic'ed

    These and the IRS are all American organisations. They would not apply for Canadians.

    Are there governing bodies or organisations for businesses in Canada that a citizen can check the legal status of a business and see how safe it may be?

     

    The Dollar Stretcher Community Manager



  • 11-18-2010 4:35 PM In reply to

    • Edey
    • Top 25 Contributor
      Female
    • Joined on 09-10-2007
    • Los Angeles County, CA
    • Posts 3,869

    Re: Pros and cons of debt consolidation programs

     From my own experiences doing debt consolidations, they do not help anything.  The extra cash available aftewards looks good on paper, but it's easy to think that you've got that money to put towards buying something else, like a car or a vacation. But soon you are right back into the same or worse position than you were to begin with. 

    The only thing that got us out of debt was snowballing payments: using every spare amount of cash to pay down first one debt, then when the first one is paid, use the payment to pay the next one down. And when you get it all paid off, be very strict at how you accumulate debt after that. We were not free of debt until after we retired, when our needs were much less than when working, we could easier go without something to get by on less money, and put as much as possible on the debt payments. 

    Good luck with what you decide - but my advice is don't do debt consolidation - it's a losing game you can't win. 

    Edey

     

    Edey's Vintage and Current Needlework Blog

    Life is like a quilt - it is made beautiful from all the little pieces stitched together.

    Use a HandCranked tool, it doesn't need to be plugged in or charged up!

    Treadle sewing machines. Get a workout and save electricity all at the same time. Plus it can go anywhere, even outdoors!

    READ THE ARCHIVES! It'll do you good.
  • 11-19-2010 11:33 PM In reply to

    Re: Pros and cons of debt consolidation programs

    In canada  there is a debt consolidation programs I though on using the office of it brandy and by the way canada has a program that does the checking for them it started when I was working for the state doing title search for canada its called the nafta prograam I did title search if there was debt on the cars and the leans againest them from canada and from here debt follows a person despite of imgrant statiouse and catch's up and for the pro and cons I thought it was to help get people out of depted not in it I have used those programs to hepled some of the poeple to get out of debt with me and also with the irs even if its goverbment owned or not ..

    So imagrants or not they all have a way of checkin if there is a history or not usally there is a fly by nite programs that use these victims poor people and elderly and imgrants to get money out of them then thats the way of the bbb better bussines burio that word I really forgot to spell I think you get the picture so when programs pop up its better to check with them bbb or caber of comserse and the town information then become a vitim.

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