Any Experience With Debt Consolidation Services _nonp
Q: I was wondering if anyone has any experience with debt consolidation services. My girlfriend has run into a bit of trouble and I?'m not sure what advice to give her. Her lease expired on her car, and when she went to finance the balloon payment the banks told her no. She is 3 months past when she was supposed to return the car and they are threatening repossession. She has missed a few payments on the lease and has several credit cards maxed out also with late payments. She also took out several lines of credit for various things so needless to say her credit, rating is very bad. I was wondering if the debt consolidation services I see advertised all the time might help. However I don?'t know if this would help her get a loan or just clear up the credit rating. She has a good income but has just let her spending get out of hand.
A: As far as I know, a debt consolidation service is simply someone (i.e., a bank) providing you with a loan. You take out a loan and pay off your multiple debts, then pay back one loan instead of many. She will pay more money in the long run if she consolidates her debt, since in theory a person would pay off all the loans more quickly if they were all paid on simultaneously (you're paying off the "principle" faster). I don't know if her bad credit history will make her ineligible for a consolidation loan. Certainly she will pay a higher interest rate if someone gives it to her, because of the increased risk, which is another reason she will pay more ultimately than if she simply made payments on the loans as they are now. The prime function of a debt consolidation loan is to free up some cash each month by reducing the amount of payment for each month to something that is manageable. This is the main point I want to make: if your girlfriend takes out a consolidation loan but doesn't change her charging habits, she will be in even worse shape than she is now--she will start to use her free cash to pay off her new debts while still paying off the consolidation loan for her old debts. She'll be sunk for sure, if this happens. If I were her, I would immediately cut up all my credit cards. I would then find a part-time job that I work at in the evenings and on the weekends, and would direct every cent that I made from those jobs toward paying off the debts. I would call each lender and see if I could work out an easier repayment schedule, but keeping in mind that I need to pay more than the minimum monthly payment on the credit card (otherwise it will never get paid off, and will be an egregiously expensive debt over the long run). A rule of thumb that I go buy is that if I am carrying a balance on a credit card, I add up the amount that was charged to the card during the past billing cycle plus the amount of interest that was charged for this cycle and then add a couple of hundred bucks on top of that. It's only those last couple of hundred bucks that is really eroding the debt. As long as you do this, pay off more each month than you charge and pay in interest, eventually the balance will go down to zero. It might take a long time. I would restrict my optional expenditures (like entertainment) to an absolute minimum, and direct that money toward paying off the debts. I would go so far as to cut my own hair (or have my wife cut it) to save what can be costly fees--if she's paying $30 a month to have her hair cut, for instance, that's $360 a year that could go toward paying off the debt. I would eat out as little as possible. I might even consider selling some personal possessions to attempt to pay off some of the "principle" of the loans. It might take me five or ten years to pay off all the debts this way, but it's either this or eventual bankruptcy. I don't think there's any good quick fix. I don't know what I would do about the car--it might be a lost cause already; I'm not sure how long they will allow payments to go unpaid before it is repossessed. It doesn't seem like she can keep it, however, if she can't get money to pay for it If you bail her out again, you'll be bailing her out for the rest of your life, or as long as she is associated with you. She has to learn to want to be debt-free herself. If you marry her, her problem will then be your problem if it isn't cured, since her credit record and yours will merge. There are some non-profit professional organizations that will help her guide herself out of this problem she's in. Look in the yellow pages; maybe someone else in this group can provide specific names. It sounds like she's really over her head--she should contact these people ASAP. She doesn't want to go bankrupt, if possible--that will hound her for a very long time. It also sounds like she should also learn a bit about finance. For instance, was it such a good idea to take a lease out on a car? Leases are notorious for (often) being bad ways to obtain a vehicle. She also should be putting away a nest egg so that she doesn't have to use the credit card to make purchases, but rather can simply "borrow" money from herself. There are a lot of personal finance books on the market that put forth these principles, and it probably would be a good idea if she were to study them. .