Debt Consolidation Loans Not Always the End of Debt, Create a Plan for No Debt Instead of a Plan for Different Debt says American Financial Solutions

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The desire to eliminate debt often leads people to take out a debt consolidation loan. However consumers must have a plan in place for determining if the loan really does benefit them or will cost them more in time and money than the debt they were trying to pay off. Accredited Financial Counselor Caeleigh Villarreal of American Financial Solutions helps shed light on this topic.

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American Financial Solutions

Remember, debt consolidation loans are not a plan for getting out of debt.

In a recent, non scientific poll conducted by Navy Federal Credit Union consumers were asked, “If you were to take out a Personal Loan what would you use it for?” Nearly 55% of respondents said they would use it for debt consolidation. Unfortunately though, these type of loans may not provide the debt relief people are looking for. According to Accredited Financial Counselor, Caeleigh Villarreal of American Financial Solutions, the two primary reasons people use debt consolidation loans to pay off debt are to:

[1] Have one, lower monthly payment

[2] Get out of debt

However Mrs. Villarreal says, borrowers may not get the deal they are looking for. “You’re not paying off the debt. You’re just changing the loan.” Her point is that while you will not owe the debt to several creditors - you will still owe the same amount. Villarreal also says that if you are using balance transfers to consolidate you may be losing money. “Often there are transfer fees of up to 5% of the balance associated with these accounts. You have to determine if those fees outweigh the benefits of making the transfer.”

Another consideration when paying off the debt is the lower payment. It feels better on the pocketbook to go from paying $300 a month on $10,000 worth of debt to $132, but it will cost a lot more over time.

Consider this example: assume $10,000 in debt

On credit cards (not consolidated), an average interest rate of 13.9% will take approximately five years to pay at $300 a month. The total interest repaid will be $2,711.

On a consolidation loan    with an interest rate of 10.00% it will take 10 years to pay the debt at $132.50 a month. The total interest repaid will be $5,900.    

You save money on a month-to-month basis, but lose twice what you would have paid in interest if the debt had been left on the credit card.

Debt consolidation can be a, “quick way to double your debt,” says Villarreal. “People take out the loan, but don’t close their accounts and they end up using the credit cards again.” The key is to pay off any debts and credit cards you are consolidating and to then close the credit card accounts.

Finally Mrs. Villarreal offers these tips when considering a debt consolidation loan:

[1] Read the small print and understand the interest rates. On a balance transfer, “Typically the interest rate is a promotional rate and is only good for 6 months to a year.”

[2] In the past, it has been tempting for people to use their house as collateral for the loan. Villarreal says this is not a good idea, “You are changing unsecured debt into secured debt and, because of the length of the loan you will pay back more money in interest than you save in payments.” In addition, if you cannot make the loan payments you risk losing your home.

[3] Contact a reputable credit counseling agency and have them complete a budget with you. A certified credit counselor will help you review your best options for getting out of debt. Credit counseling agencies can offer you a Debt Management Plan that, through creditors, provides benefits such as reducing interest rates, reducing payments and stopping late fees. According to Villarreal, “the DMP provides the best benefit if your goal is to get out of debt.”

“Remember,” says Villarreal, “debt consolidation loans are not a plan for getting out of debt.” To create a plan, talk to a legitimate, non-profit credit counseling agency that can help people find the best options for truly, getting out of debt. Contact the National Foundation for Credit Counselor or the Association for Independent Consumer Credit Counseling Agencies to locate a credit counseling agency.

American Financial Solutions (AFS) is a non-profit 501(c)3 financial education and credit counseling agency that helps people find solutions for managing their money and improving their financial lives. Since 1999, AFS has helped individuals across the United States through one-on-one counseling, classes and the use of debt management plans. AFS is a member of the National Foundation for Credit Counseling (NFCC) as well as the Association for Independent Consumer Credit Counseling Agencies (AICCCA). AFS is also accredited by the Council on Accreditation (COA) and has an A+ rating by the Better Business Bureau. Find us and add us on Facebook, Twitter and Google+.

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Becky House