Imagine you find yourself with $30,000 in unsecured debt (credit cards, student loans, and personal loans). One debt is for $10,000 at 12% and a second debt is for $20,000 at 10%. Together, your total monthly payment on both loans is $1,100 per month.
A debt consolidation company’s ad catches your attention, you contact them, and they promise to lower your payment to $640 per month with an interest rate of 9%. That’s a savings of $460 per month and they will contact your creditors after rolling your two loans into one loan. Sound too good to be true? It is too good to be true because it will take you six years to pay off your new loan!
In the end, you will pay an extra $5,688 to pay off the new loan of $46,080 instead of paying $40,392 for the original loans. The debt consolidation company makes $5,688 for “helping” you.