Living in a world of computers, iPhones, PVRs and other tools of the internet, is amazing. At times it seems that everything is moving quicker, faster and at the speed of light. Everything that is, except personal debt! I see people on a regular basis that report to me that they have an excellent credit record and a great credit score, but can’t seem to reduce long term debt and the balance owing on their cards and loans.
The reason for their insolvency is minimum payments. They are getting seduced into a regular minimum monthly payment which does little to reduce their debt, but does plenty to increase their credit worthiness. After all, a creditor doesn’t make a lot of money on someone who pays their monthly balance off, and they love people who don’t! Few people will actually go on-line to check out just how much the interest rate will affect their debt commitments, and just how much it will cost them extra in interest before the debt is fully paid. The need for instant gratification or cash has blinded them to the reality of what they are looking at long-term.
Here is a typical situation of a young couple who come in to see me with a credit card, a consolidation loan and a personal loan. It doesn’t sound too overwhelming when they describe that they make monthly payments of $475 on a total debt of $35,000. But when you look at the details, it becomes apparent that these people are going into financial difficulty for quite a while.
Here is their debt broken down into three loans:
- a store credit card for $5,000,
- a consolidation loan for $20,000, and,
- a personal loan of $10,000.
It is when you calculate the interest rate charged, that you see the scary facts. The store credit card’s interest rate is 28.89% per year – making minimum payments of $125 per month will take 11 years and 6 months to pay off. If their credit score is not the best, a consolidated loan interest rate can be 10%, which sounds AMAZING compared to the store card! But the minimum payment for a $20,000 loan is $250 a month and will also take 11 years to pay off! The personal loan, if obtained at 5% per year and paid at $100 per month, will take 10 years and 9 months to pay off.
Their $35,000 debt has taken 11 years for them to pay off and really cost them $63,000. In total – this couple will pay over $28,000 in interest alone. Trying to renegotiate loan rates is not always feasible and can lead to a higher monthly payment over a shorter period of time, so not always a viable solution.
But there is light at the end of the tunnel and a way to have all this financial woe behind you in five years or less! A Consumer Proposal could be the perfect solution for your money troubles. It allows you to leave your assets untouched, stop the interest cycle and pay down your debt by entering into a negotiated settlement with your creditors and keep the dreaded word “bankruptcy” off your credit record. Call A. Farber & Partners Inc. today for your free initial consultation and see what plan works best for you.