We've all seen the man on television who claims, "If installment payments or overdue bills are troubling you, we will consolidate all your bills into one low monthly payment. In addition, you will have a long time to pay back this loan." This is a bill-consolidation loan, which lets you pool your debts.
But rarely does the TV salesman mention the interest rate you will be charged. His pitch is small monthly payments that seem to be affordable. But are they?
First, any money that is very easily available is likely to be very expensive. Most of the people who go this route are poor credit risks, so the lender has to make up for the additional risks by charging very high rates.
Although the money is paid back over a relatively long period of time (generally five years), you usually pay interest on the entire amount each and every year.
Say you have $1,000 in outstanding bills. The lender tells you, "We will help you get out of trouble. All your bills will be taken care of, and you will pay us a monthly installment of $49.95." Sound good? Not when you add up the interest charges.
Is it ever a good idea to take out a loan to consolidate your bills? The answer is "yes," but only when it is cheaper to do so than to continue to pay your present bills. In most cases, this can only be done through a "homemade" bill-consolidation loan.
To create this homemade loan, make a list of all your available sources of money: friends, relatives, employers, banks, credit unions, savings and loan associations, life insurance policies, home equity, etc. Write them down, starting with the lowest rates.
Next, list your outstanding debts with their interest rates and finance charges.
Only those loans that charge a higher rate than you will be paying on your new loan should be consolidated. Most likely, a fixed-rate mortgage or home equity loan will be your best route. The rates are still quite low today, and if you itemize on your tax return, the interest payments will be tax-deductible.
Send a letter to those creditors who do not charge interest, offering to pay off the debts over the next year in monthly payments. In most cases, the creditors will be willing to cooperate with you.
If you can't borrow from anywhere and your creditors are uncooperative, get in touch with your local Consumer Credit Counseling Service, which provides counseling on personal budgets and credit problems through more than 600 offices across the country. Most major cities have one, and these services are either free or entail a low fee. To locate the consumer counseling office nearest you, look in your local phone book, or call (800) 388-2227 toll-free from a touch-tone phone.
Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Susan in care of The Sun, 501 N. Calvert St., Baltimore, MD 21278. All letters will be treated confidentially.