Have you heard the story of the Greek king Sisyphus who was doomed to push a boulder up a hill every day only to see it roll back down? The following day he would repeat this ineffectual action and get the same result. There’s a chance you feel the same way about your debt – there’s no end in sight and trying to make progress paying it down is futile.
You have probably also heard about debt consolidation as a way to get your debts under control. While this certainly could be a good option, let’s first clarify these six myths.
- There are companies with lower interest rates than others
- Credit counseling could get your monthly payments cut in half
- You can’t get out of debt without a formal program
- Some credit counseling agencies can negotiate lower debt management plan payments than others
- You will always save money through debt consolidation
- Bankruptcy is not a big deal
1. There are companies with lower interest rates than others
One way to consolidate debts is by taking out a new, single loan to pay them off. Perhaps you have seen teaser ads for home equity loans that tout very low interest rates and feel this might be a good option.
But the fact is you would likely need to meet strict standards to qualify for one of those low rates. Otherwise, you can probably expect to pay the prime interest rate plus 4% or 5%, as well as a point or two in fees.
2. Credit counseling can get your monthly payments cut in half
A good credit counselor could work with your creditors to get your interest rates reduced and any late payment penalty fees waived. This could mean a lower sum than your current monthly payments, but it won’t cut them anywhere close to 50%.
If a credit counselor claims they can get your payments cut in half, it is probably just number fudging. As an example, if you missed two $200 payments on a $10,000 balance, your third month’s bill will include the $400 you still owe for a total of $600.
If your counselor re-ages that bill and knocks your payment back to $200, the missing money may simply be tacked back onto the total owed.
3. You can’t get out of debt without a formal program
The bottom line here is that you could basically create your own debt management program. Almost all creditors, including credit card companies, offer special reduced-interest programs you can request.
Of course, you usually have to make all those phone calls yourself and you will need to know what to say. You will likely have to be very persistent because you probably won’t get through to the company’s hardship program department on the first or even the second call.
And when you do get through you need to be polite and be ready to request something specific such as a reduction in your interest rate.
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4. Some credit counseling agencies can negotiate lower debt management plan payments than others
When you go to a consumer credit counseling agency, your counselor will probably help you create a debt management plan (DMP). They will then typically contact your lenders and present it for approval.
If all your lenders accept the plan, you may no longer be required to pay them. Using this approach, you will typically send your counselor payment each month, who will then distribute the money to your creditors.
However, it’s generally a myth that some credit counseling agencies can secure a lower DMP payment than others. The truth is that most lenders will usually have a policy to automatically move those who are enrolled in a DMP into their own existing programs.
This means that regardless of which credit counseling agency or company you choose, chances are good that you may pay approximately the same amount.
5. You will always save money with debt consolidation
If you’re told that a debt consolidation loan will save you money, pull out your calculator and do the math. As an example, let’s assume that the lender tells you they can get financing with no out-of-pocket costs. In this case, make sure they’re not just rolling their fees into your loan where you would then be responsible to pay interest on them.
To know exactly what you’re getting into, compare the total of your existing monthly payments to what they would be if you rolled that amount into a debt consolidation loan. Be sure to include fees and any voluntary contributions. If you’re not saving at least 5% to 10%, you should consider taking a debt consolidation loan off the table as an option.
6. Bankruptcy is not a big issue
Sometimes, young people are led to believe that declaring bankruptcy is a better option than trying to pay off the debt. This might seem appealing when it’s possible to hire a bankruptcy attorney for as little as $500 to get thousands of dollars discharged in court.
But the fact is, bankruptcy comes with long-lasting consequences and should typically only be used in extreme circumstances.
National Debt Relief offers several debt relief options. We can work with you to create a plan you can afford and will often check in to ensure things are going smoothly.