Surviving the Debt Consolidation Maze

We’re a nation of borrowers. For individuals, businesses large and small, and the country, debt has become a crushing burden that affects us all. While most of us don’t play a direct role in solving the governmental or corporate debt issues, each of us is critical to controlling our own personal debt load.

In an ideal world, we’d all have enough money to pay for life’s expenses as they occur and debt wouldn’t be an issue. Still, there are very few among us who don’t have to take out a mortgage to buy a house or a loan to make major purchases like a car now and then. Those are known as secured debts in that the lender holds title to the property purchased until the loan is paid off. Failing to make the required payments on a mortgage or car loan ultimately results in the lender taking possession of the house or car.

The Minimum Payment Trap

Unsecured debt is the focus of our debt consolidation site. This kind of debt is primarily credit card debt but it can also be other sorts of installment loans or personal debts for which the lender doesn’t have the recourse of repossessing property if payments aren’t made. Though estimates vary widely, it’s safe to say that the average American carries between $8,000 and $12,000 in credit card debt.

The interest rates that are charged on such debt is typically very high compared to secured loans with percentage rates often ranging from the high teens to nearly thirty percent. Because this type of credit is easy to obtain, many people find it easy to over extend themselves. Minimum monthly payments on credit card debt is small, often only two or three percent of the outstanding balance, so it’s easy to justify purchases. After all, we may reason, what’s anther $10 per month.

Of course, all of those little charges add up…quickly…and before long, many people find that just making the minimum monthly payment is a challenge. Making just the minimum monthly payment is a no win game. As an example, paying off $10,000 in debt on an account with an 18% interest rate and a 2.5% minimum monthly payment will take just under thirty-two years and the total interest paid would be nearly $15,000! And that example is pretty reasonable in the credit card world. A single percentage point increase in the interest rate to 19% would lengthen the payoff period by thirty-two months and increase the interest charge by $2,205!

It’s easy to see how one can easily get trapped in a seemingly endless financial nightmare. Millions of Americans owe far more than our $10,000 example and pay interest rates that are much higher than 18%.