| 10 debt consolidation myths |
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| But just how low is too good to
be true? Bour's rule of thumb: If 90 percent of the lenders are advertising a
5.75 percentage rate, the lone shark waving even a 5.25 should send up a red flag.
"But it doesn't because people always think they're smart enough to find
the deal no one else has," he says.
4. Some agencies can negotiate
lower DMP payments than others.
That would be true
if this debt management programs involved negotiation. They don't. A majority
of creditors have existing programs where they automatically shuffle off 95 percent
of individuals enrolled in a DMP, says Greenberg. If
a counselor indicates differently, you are in the clutches of a debt settlement
program. This version accepts your monthly lump-sum payments, but holds that money
until creditors scream. At that point, the debt settlement personnel negotiate
to repay cents on the dollar. Your credit rating gets maimed in the process. 5.
Debt settlement is the cheapest way to go.
Greenberg urges anyone introduced
to a debt settlement program to run hard in the opposite direction. "First
of all, it's unethical," he says. "It's just wrong to make payments
on an account and have the money sit in someone else's pockets until the creditor
gives up on the collection calls." The real skunks insert a clause in the
contract that says if you miss a payment to the debt settlement company, it keeps
all the money in the ante as a fee. Secondly, this route dings
your credit history severely, as all those "pay us now" letters count
against you, not the company. Finally, the amount the creditors forgive in the
end is considered income for you, and you owe taxes on that amount. "If you're
going to take this route, you might as well declare bankruptcy," Greenberg
says. 6. You need a formal program
to get out of debt.
Many creditors will enroll you in their special
reduced-interest programs if you approach them as an individual. The pain comes
in making all those phone calls and knowing what to ask for. Home
equity lines don't require third-party guidance, nor does refinancing your first
mortgage to get your hands on a lump sum of cash. On the flip side, these options
still require spending discipline on your end lest you wind up with a mortgage
payment, home equity line invoice and another $10,000 credit card debt six months
down the road. This time, your house is on the line. 7.
Debt consolidation always saves you money.
Better ask a calculator to
determine the truth of this statement for your situation. For example, if a lender
assures you it can secure financing with no out-of-pocket costs, that doesn't
mean it's a kinder, gentler source of funds. It's code for "We're rolling
our fees into your loan, where they are also subject to the interest rate."
The truly unfortunate fall victim to flipping -- a process
that ruined one of Musci's elderly clients. A lender offers a debt consolidation
loan plus cash out, with no out-of-pocket fees. A year later, it calls again to
say that since your home has appreciated, could you use more cash? Say yes, and
they again sock you with fees hidden into those monthly payments. This cycle continues
until you break.
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