The following is Part 3 of a 6 Part Series on
Getting Out of Debt
Presented by the Consumer Defense Corporation
Which is best for me?
How about Debt Consolidation?
Here’s how that works – you borrow money to pay off debt. You dig a hole to fill up a hole. You still have the same amount of debt – plus probably some heavy closing costs. You shift unsecured debt to secured debt, usually by pledging your equity in a home. What makes this seem attractive is the reduction in monthly payments.
That suckers in a lot of people – until they do the math. With consolidation you extend your payments over 20 to 30 years which makes the total payout more than twice as much. Even doing a net present value analysis will show that debt consolidation is a bad choice. The fact is that it is the most expensive choice of them all.
The reason it is so heavily advertised on television is explained by the huge profits that it makes. A side note, in today’s terrible housing market and tightened credit, this option may be drying up.
There is a better alternative than bankruptcy, debt settlement, or consolidation. We’ll discuss that next.