Truth About Debt Consolidation

Truth About Debt Consolidation

Every day more and more people are trying to find the truth about debt consolidation. This is easier said than done, however, because there is a lot of information floating around; and some of it is of rather dubious quality. So to set the record straight, let’s look at the basic truth about debt consolidation right here.

The first truth about debt consolidation is that it does not eliminate debt. This is not a criticism, however: consolidated loans aren’t intended to eliminate debt, and borrowers who misbelieve that they do are in for a rude awakening. The truth about debt consolidation is that it replaces debt; not eliminates debt. This new debt will be at a lower interest rate than the debt it replaced. That brings us to our next truth about debt consolidation: paying down debt.

The second truth about debt consolidation is that it won’t, in and of itself, reduce debt. That is the job of the borrower; not the loan itself. Here’s why this is a very important truth about debt consolidation.

Let’s say you owe $5,000 in debt on 2 credit cards, and each card demands 20% interest per year. So in one year, you pay $1,000 in interest (and your balance remains $5,000). Now here comes the second important truth about debt consolidation that you must bear in mind at all times.

Let’s say your new consolidation loan is for $5,000, and the interest rate pegged to it is 10%. So in a year, if you don’t pay any of the balance, you spend only $500 in interest. So you have just saved $500, right? Well, the truth about debt consolidation is that you’re only half way right!

It’s not that you should spend that $500 you “saved”. In order to work towards debt freedom, you must use some (or ideally all!) of that saved $500 towards the principal of the new loan. In this way, you’ll owe less in a year; and even less than that in two years, and so on and so on.

These are the two most important “truths” you need to know when it comes to discovering the truth about debt consolidation. Ensure that you keep them firmly in mind, and you will most likely be ensuing that your debt consolidation solution works for you in the long run.

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