Credit Out of Control, Part Three – Debt Consolidation

19 Jul Credit Out of Control, Part Three – Debt Consolidation

So you’ve decided to buy that new cell phone or new car. (see Parts One and Two) But your monthly payments are a pain in the neck. The bills come at all different times of the month and you don’t have enough money to make all the payments. What do you do? Borrow more money of course.

Watch those commercials on TV. They offer any number of ways to make your dollar stretch further. Get a home equity loan, a new credit card or buy on deferred billing. That will help you have more stuff without paying more money right?

Remember that old saying, “If it sounds too good to be true, it probably is.” There are consequences to any of the options. A home equity loan will allow you to draw on the equity in your house but what are the drawbacks? One, any mortgage loan will involve some closing costs – if not for a lawyer to represent your interests, then at least for recording fees and title searches. Two, the money you are borrowing is your own. If you have value in your home, then you will be paying for the privelege of turning that value into cash. It’s your money, but you will be paying interest on that money to someone else. If your house is really worth that much, why not just sell it to pay your bills or get the cash to buy that new cell phone. Three, you will be paying on that loan for thirty years. You just turned a short term loan into a long term obligation. Add up the total interest you will be paying – a five year loan for $10,000 at 12% is a payment of $222.44 per month and $3,346.57 total interest. That same loan turned into a home equity mortgage at 6% will have a payment of $59.96, but interest of $11,583.82 over the life of the loan.

Did you really save any money?

“ConnecticutGene Melchionne is a bankruptcy lawyer covering the entire State of Connecticut. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

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