For many years now, debt consolidation loans and balance transfer methods have remained the sole resort for numerous debt ridden individuals out there. These two debt relief ways boast of offering you the most convenient ways to get out of debt by offering a relatively lower, single and an affordable monthly payment.
Balance transfers and debt consolidation loans are more or less the same thing. They offer a low (sometimes 0%) interest rate for a set period and after that raise it back to customary or at times, abnormal.
Though at times, these methods might seem as helpful - after all you are saving some money through lower interest. However, you need to know that personal finance is not always about the numbers - it's all about behavior. Most debt relief methods are harmful if compared to the boons it ushers, and seldom lead you to become debt free.
You actually pay more on interest: Let's deal with the numbers first. In debt consolidation, you just take out a new loan to cover all your existing loans at a lower monthly payment. Sometimes, the lender charges a fee for approving the loan. Sometimes, not! Moreover, usually, they assign an interest rate based on your credit and your current financial situation. Since this is usually an average interest rate, you would end up all your lower interest rate lumped in this relatively higher interest rate. The bottomline is, if you pile up all your debts without any discrimination, you'll end up paying an overall higher interest rate.
The lower monthly payment is a myth: Another issue with this debt relief method is that they offer you a lower monthly payment just by stretching the tenure of the loan. Even if we refrain from doing any math, and think logically, the longer you stretch a loan out, the lower the monthly payment will be. However, unfortunately, you'll end up paying more both in interest and principal.
That said, most people save nothing even after successfully completing a debt consolidation program.
A trick of banks to pull off your money: Essentially, balance transfers are less organized debt consolidation loans. It's just a trick to transfer your debt to them so that can get the money (the principal, interest, and other charges) off you, rather that the bank you're currently paying to. Most banks attaches a balance transfer fee to the program, which is usually 2%-3% of the principal, which closely negates any savings you'll probably have at the end of the program. Again, once the promotional offer ends, the interest rates are raised to the base level.
The banks make the most of your spendthrift behavior: You need to keep in mind that nobody is here to do any charity and each one works toward his/her self-interest. The prime reasons behind these banks eagerness to help you is that they know well that you're not going to pay off the balance. Even if you do, chances are pretty good that they'll take their fees beforehand.
But how on earth could the banks know about your inability to pay? If yes, why did they lend you then? Well, the reason is pretty simple. The banks know very well that if you find no hardship in paying the monthly payments as decided, you'd continue to live your financial life that way you've lived in past and which will ensure continuous inflow of cash for the bank.
Unfortunately, you've just bought the banks product - another debt, in search of a remedy to your existing problem. It's nothing other than a wolf in a sheep's clothing.